How can use Phillips curve as an instrument of economic policy. (Trade off problem)

How can use Phillips curve as an instrument of economic policy. (Trade off problem):

Paul Samuelsson and Robert-M- Slow has explain in an article (analytical aspect of anti-inflation policy published in 1960. In this article they have given an idea that Phillips curve can be used as an instrument of Economics policy they have also given the concept that I trade of exist between rate of inflation and level of unemployment so we can choose alternative on a Philips curve shown below figure 1.1

Figure 1.1

The connection with the original Philip's curves can be established with the help of two different approaches

Through the assumption of constant increase in the price of cost of per unit of labor by different firms. In this approach rate of inflation is equal to the between rate of money wage change and change in the productivity of labor this method is used by two different economist Neil and j. Gordo

π= Δw-Δmp2

π=rate of inflation

πw= money wage change

πmpl= marginal productivity of labor change

In the second approach explain through the working of wage price system in it change in wage rate is a function of inflation rate and rate of unemployment

ΔW= f (π, µ)

And inflation rate is a function of rate of change in money wage rate and excess demand in goods market.

ΔW= f (π, µ)

π =f (Δw, EΔ)

ED= Excess demand

Figure 1.1

This method has been used by Robert.M. Solow and S.H. Hymans and Waynared again professor lipsey has contributed in the explanation of trade off problem combining Philips curve with hypothetical concuss welfare function which expresses preference for alternative combinations this concuss welfare increase toward origin as explain with help of diagram shown below:

Figure (2.2)

in the above diagram of hypothetical welfare function is tangent to Phillips curve at combination of point B which is showing rate of inflation π₃ and rate of unemployment µ3 in the above diagram it is also shown that we can reduce unemployment by using expansionary demand policy but it will result in a higher rate of inflation but another question arise that if we want to maintain a specific level of rate of inflation we can travel to right ward of a Philips curve for example in the diagram below we want to maintain 5% rate of inflation in the country to maintain this level who can shift to right off point H

Figure 2.3

the answer to this question is given by the concept of natural rate of unemployment given by edmand Phelp and Milton Friedman according to these two economist with the help of natural rate of unemployment concept we can provide an answer to this problem the definition of natural unemployment rate  (NUR) is that it is some level of unemployment having the property that it is constant with any rate of inflation which is anticipated in the above definition we have used a term anticipated rate of inflation we used to explain the concept of anticipated and anticipated rate of inflation theory with the help of is concept we also explain either there is a stable relationship between inflation and rate of unemployment it provide us concept of short run and long run Phillips curve.

Author: Nasir Mehmood Ch                 مصنف: ناصرمحمود چوہدری 

Email: Nasirmehmoodch97@gmail.com