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Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”.

Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”. Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego. Medium run approach. The Philips Curve. What does the Philips curve show?.

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Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”.

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  1. Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”. Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego.

  2. Medium run approach The Philips Curve

  3. What does the Philips curve show? There is a negative relation between the inflation rate and unemployment rate.

  4. What does result from the Philips curve? For the policymakers it may sound like: ”there is a kind of trade-off between unemployment and inflation”. Is it true? Should the policymakers be happy that they found an easy pass to manipulate both money and labour markets to meet the current expectations? To an extent, it is true. But… do not forget what time-period you actually tend to consider. The nature of relation can significantly change over time! So it is not an easy pass, it is not always that the policy-makers can trade off… Unfortunately…

  5. Basics of the Philips curve AS relation: Let’s define one of the component of the AS relation more precisely:

  6. Basics of the Philips curve Let’s put our new function into AS relation: Now instead of talking about price levels, let’s talk about rates. To transform this equation into ”rates” formula, we need to make the following transformations:

  7. Equation no.11 describes the Philips curve relation.

  8. What can we read from the Philips curve relation? • An increase in expected inflation leads to an increase in inflation. • Given expected inflation, an increase in the markup or in the factors that affect wage determination lead to an increase in inflation. • Given expected inflation, an increase in unemployment rate leads to a decrease in inflation.

  9. What does lay behind the Philips curve? • Low unemployment leads to a higher nominal wage. • Wage push-up leads to increase of prices by firms. • Workers modify their expectations due to higher prices, they ask for higher nominal wages. • The higher the wage is, the higher the price set by the firms is. • The higher the price is, the stronger the workers’ pressure on wage increase is.

  10. What does lay behind the Philips curve? That is a wage-price spiralmechanism decription. In such a case the economy suffers from steady wage and price inflation.

  11. A new approach towards natural unemployment rate: As we remember if current price level equals expectations, then the natural unemployment rate is settled in the market. In other words, if current inflation rate is equal to the expected one, then the natural unemployment rate is achieved. We can write it down using Philips curve relation:

  12. A new approach towards natural unemployment rate: Considering thus, we are able to use the former equation to calculate the natural unemployment rate: The higher the markup and the higher the factors affecting wage setting the higher the natural unemployment rate. Among these factors we should look for the reasons for the natural unemployment rate variation over the countries.

  13. Another important way of thinking about the Philips curve relation: If we rearrange the former natural unemployment rate definition, we can receive: If we replace it into the Philips curve relation and we will rearrange it, we can receive:

  14. Another important way of thinking about the Philips curve relation: Now, if we assume that in fact, people build their expectations on the basis of their own observations, we can accept the reasoning that expected inflation rate is equal to the previous year one, therefore: It means that the change in the inflation rate depends on the difference between the actual and the natural unemployment rate.

  15. Another important way of thinking about the Philips curve relation Summing it up: when the actual unemployment rate is higher than the natural one, the inflation rate decreases the natural rate of unemployment is the rate of unemployment required to keep the inflation rate constant, i.e. NAIRU – nonaccelerating inflation rate of unemployment

  16. Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”. Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego.

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