What is Phillips Curve?
- The Phillips Curve is an economic concept developed by A.W. Phillips in 1958.
- Phillips Curve describes the relationship between inflation and unemployment in an economy.
- Inflation is defined by the increase in the average price level of goods and services over time. When there is inflation, the value of money falls. A low inflation rate indicates that the average price of goods would not rise as high.
- Unemployment exists when someone is actively seeking a job but is unable to find any despite their willingness to accept the going market wage rate.
- The Phillips Curve states that there is an inverse relationship between inflation and unemployment which means, if unemployment decreases, inflation will increase, and vice versa. For example, after the economy has just been in recession, the unemployment level will be fairly high. This will mean that there is a labor surplus.
- As the economy has just started growing, the aggregate demand (AD) will increase and therefore leading to an increase in employment. In the beginning, there will be little pressure for a rise in wages. However, as the economy grows faster and more people are employed, wages will start rising slowly.
- This will increase the firm’s cost of production and the high costs are usually passed on to the customers in the form of higher prices. Therefore a decrease in unemployment has led to an increase in inflation and vice versa.
- The Curve is shown as under
- Using the data from the 1950s and 1960s when the world economy tends to be stable, the Phillips Curve relationship proved to be true for many economies such as the United States and the UK. However, during 1967-1970 most countries such as the US, Britain, and France had doubled their inflation. In 70’s the concept of a stable Phillips Curve shows a breakdown as the economy suffered from both high inflation and high unemployment simultaneously. Economists refer to this kind of situation as stagflation where stagnant economies and rising inflation occur together.
How to Prepare Phillips Curve for RBI Grade B?
- First, you need to understand the core concept of inflation and unemployment as the Phillips Curve concept is based on these 2 terms.
- Then go through the Phillips Curve via any standard book specified in the official syllabus.
- Try to instill the core concept and graphical interpretation and practice the MCQs.
- You can practice questions related to this topic in any book, through our quizzes and mock tests.
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