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Phillipscurve

short-run

The Phillips Curve shows the relationship between inflation and unemployment in an economy. Generally, the lower the unemployment rate, the higher the inflation rate is.


Short-run

The short-run Phillips curve illustrates the trade-off between inflation and unemployment. This is shown in the image to the right.


Long-run

The long-run Phillips curve differs from the short-run quite a bit. Instead of a downward sloped curve, there is just a vertical line fixed at the natural rate of unemployment. Does not show the tradeoff between unemployment and inflation.


Use in Economics

Not many economists place much faith in this curve because it is only based on general historical data. Some years the data seemed to fit the theory illustrated in the Phillips curve, other years the data did not support it

History

The Phillips curve lost some of its strength when some countries experienced stagflation. Stagflation is when both the unemployment rate and the inflation rate are high. Obviously the curve in context does not show that this could happen, so it lost some credibility.

When stagflation occurs no macroeconomic policy can deal with it. There is no way to address both issues at the same time. Supply shock can be a cause of stagflation.

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