The Phillips Curve: Understanding the Relationship Between Inflation and Unemployment

📈The Phillips curve shows an inverse relationship between inflation and unemployment in the short run.

📉In the long run, unemployment tends to gravitate towards its natural rate regardless of inflation.

📊There are multiple Phillips curves for each economy, depending on the economy's natural rate of unemployment.

💡The Phillips curve trade-off between inflation and unemployment is not a deterministic relationship.

🔎The relationship between inflation and unemployment depends on the economy's adjustment to reach the natural state of unemployment.

What is the Phillips curve?

—The Phillips curve illustrates the inverse relationship between inflation and unemployment, showing that when one decreases, the other tends to increase.

Is the Phillips curve applicable in all economies?

—The relationship between inflation and unemployment depends on the economy's natural rate of unemployment, so there can be multiple Phillips curves for different economies.

Does the Phillips curve still hold true today?

—Economists have found that the Phillips curve trade-off between inflation and unemployment only holds in the short run, and in the long run, unemployment tends to gravitate towards its natural rate regardless of inflation.

Can policymakers control both inflation and unemployment simultaneously?

—According to the Phillips curve, there is a trade-off between inflation and unemployment, meaning that a small decrease in unemployment could be accompanied by a small increase in inflation.

What factors affect the relationship between inflation and unemployment?

—The relationship between inflation and unemployment depends on the economy's natural rate of unemployment and the economy's adjustment process to reach that natural rate.

00:00[Music]

00:04In the first half of the 20th century, economists believed inflation and unemployment were independent problems.

00:14In 1958, economist A.W. Phillips observed an inverse relationship between wage inflation and unemployment for the United Kingdom.

00:39Years with low unemployment tended to have high inflation, while years with high unemployment tended to have low inflation.

00:59This relationship became known as the Phillips curve.

01:27In the long run, the Phillips curve trade-off between inflation and unemployment only occurs in the short run.

01:46Unemployment gravitates towards its natural rate regardless of inflation.

02:22The relationship between inflation and unemployment depends on the economy's natural rate of unemployment and the economy's adjustment process.