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Phillips curve was invented in 1958 in United Kingdom by an economist and engineer named Albert William Phillips. Phillips stated the curve as an inverse relation between Wages and Unemployment. His discovery of the curve was based on the data in United Kingdom. This curve is also known as “trade-off curve”. ‘The Relationship between Unemployment and the Rate of change of Money wages in United Kingdom’ was the title of his published article. In this article he showed the negative correlation between rate of Unemployment and rate of Inflation. Later on he showed, the years with low Unemployment tend to have a high Inflation, and years with high Unemployment tend to have low Inflation.
Phillips concluded that the two Important macroeconomic variables such as, Inflation and Unemployment were linked in way that economists had not previously appreciated. Two years later, two economists namely, Paul Samuelson and Robert Solow who published an article in the American Economic Review called “Analysis of Anti-Inflation Policy”. This article was similar to Phillips, which showed negative correlation between Inflation and Unemployment, according to the collected data for the United States. They reasoned that this “Correlation arose because of low Unemployment with high aggregate demand, which in turns puts upward pressure on wages and prices throughout the economy”.
An illustrative graphical description on Phillips Curve:
The Phillips Curve illustrates a negative association between the Inflation Rate and the Unemployment Rate. At point A, Inflation is low and Unemployment is high. Where as at point B, Inflation is high and Unemployment is low.
Many Economists were interested in Phillips Curve, because they believed that it held important lessons for Policymakers. In particular, the Phillips Curve offers Policymakers a menu of possible economic outcomes. By altering the monetary and fiscal policy to influence the aggregate demand, policymakers could make a choice on any point on this curve. As, Point A, offers high Unemployment and low Inflation. Point B, offers low Unemployment and high Inflation. Policymakers might prefer both low Inflation and low Unemployment, but according to historical data summarized by the Phillips Curve indicate that this combination is impossible.
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