There are a lot of different economic theories that you can find in the world. Among all these, the Phillips curve is something that everyone who is affiliated with the economy has heard of. This curve shows the relationship between unemployment and inflation.

If you are eager to learn more about this concept and how it can help you in different ways, then this article is just for you. This guide has all the essential topics related to the Phillips curve, such as the principle, the fundamental concepts, and all the significance of this theory. So, let's just dive right into the world of knowledge and learn more about this principle.

What is the Phillips Curve?

The Phillips curve is a well-known economic concept that tells the relation between the unemployment rate and the inflation that is going on in the world. This curve was first introduced in 1960 by A.W. Phillips, and since then, it has played an essential role in understanding the economy.

According to this concept, the unemployment rate and inflation have an inverse relationship. This means that if inflation increases, then unemployment decreases and vice versa.

In this Phillips curve, the inflation is placed on the Y-axis while the employment rate is placed on the X-axis. When the numbers are put on the graph, this usually represents a concave shape or a slope on the curve. This is the graphical representation of this relationship.

This means that when there is a higher rate of inflation, only a higher rate of employment can be achieved. This curve plays a vital role in making the policies and inducing economic growth. When the Phillips curve is properly made, on the basis of the findings, the employment rate is increased, and there is development in the economy.

However, it is seen that the implication of this curve all around the world and in different economies is very short-term, and it fails to show results for long-term situations.

How to Calculate the Phillips Curve?

Now that you know what the Phillips curve is and how you can use this curve to see the relationship between unemployment and inflation, you must understand how to calculate it.

Mentioned below is the formula that you use for the inculcation of this curve.

Phillips Curve = π = πe −h(u−uN),h >'' 0

In this formula:

• π is equal to inflation
• πe is known to be the expected inflation
• U is the rate of unemployment
• H is the fixed positive coefficient.

You simply need to add the values in this formula, and you will be able to understand how much employment can be achieved when inflation is high.

Advantages and Disadvantages of Phillips Curve

Advantages:

After learning about the formula and how you can calculate the values for the Phillips curve, let us have a look at the advantages of this curve.

Helps with Policy Making

The first and most significant advantage of using this Phillips curve is that it guides the policymakers. This curve is the trade-off between inflation and the unemployment rate. With the knowledge of this, the policymakers can tailor the old rules and regulations and generate new policies to have a balanced economy.

Tells the Initial Magnitude

As mentioned above, this curve is not suitable for long-term uses. However, it can be excellent to know about the initial relationship and the magnitude of the unemployment. This information can be further used to provide more education about the relationship between inflation and unemployment.

Pinpointing Inflation

With the help of this curve, the economist can also pinpoint when there will be an increase in inflation. This is a creative way to change the policies and use the increase in inflation for your benefit. In such situations, new rules and regulations are made so that there is no compromise on the economy and the employment rate when there is inflation in the world.

Disadvantages

Now that you know the significant advantages of using the Phillips curve, the following are some of the disadvantages that come with it.

Not Good for Long-Term Strategies

The Phillips curve can easily be used when it comes to short-term planning and policy making. However, if you are trying to use the values and information provided by the curve, then it will not be successful. The information will help you make decisions for the future, and you can use it as a forecasting tool. However, making long-term decisions on the basis of this curve might not be the right decision.

Does not Provide the Complete Picture:

According to the Phillips curve, the relation between unemployment and inflation is based on the local problems of the country, and it does not show the international factors that might affect it. This is why this curve is not entirely reliable, as it ignores the fact that

Final Words

The Phillips curve is considered a valuable tool for economists and policymakers as it makes it very easy for them to understand the relationship between unemployment and inflation. Despite being a fantastic tool in this modern world, there are a lot of limitations that are associated with this curve. This is why it can be suitable for making short-term policies and forecasts, but it might not be the right tool for the long term.