Question

Briefly describe the theory of the Phillips curve and its origin of development as a theory of inflation-unemployment trade off

Answer 1

Philips curve is basically the inverse relationship between inflation and unemployment.W.H.Philips during his study of wage inflation and unemployment in the UK from 1851 -1957 observed an inverse relationship between unemployment and wages, that is when unemployment was high wages moved up slowly whereas when unemployment was low wages paced up quickly. He was of the opinion that when the unemployment level is low then the firms try to increase the wages so as to attract the scarce resource, that is labor. He first showed the relationship of unemployment and wages over the business cycle and hence the relationship of wage inflation and employment. Economists around the globe started applying the curve to developed countries and used inflation and unemployment as the variables. This developed the Phillips curve as the theory of inflation unemployment tradeoff.