Phillips curve | Inflation - measuring the cost of living | Macroeconomics | Khan Academy
TLDRThe video script discusses the Phillips curve, a concept that illustrates an inverse relationship between unemployment and inflation. It explains that when unemployment is low, there is high labor market utilization, leading to increased wages and buying power, which in turn raises demand and production, potentially causing inflation. However, the script also highlights exceptions to this relationship, such as the 1970s stagflation in the US, which saw high inflation and unemployment simultaneously, often attributed to supply shocks like the oil crisis. The late 90s, on the other hand, saw low inflation and unemployment, attributed to technological advancements that increased productivity and prevented price increases. The video emphasizes the complexity and nuances of economic relationships, reminding viewers that while correlations can be observed, they are not absolute laws.
Takeaways
- 🔍 In the late 1950s, William Phillips identified a correlation between unemployment and inflation, which became known as the Phillips curve.
- 🕵️ Irving Fisher had noticed the relationship between unemployment and inflation decades earlier, but it was Phillips' publication that captured public attention.
- 📊 The Phillips curve suggests an inverse relationship between unemployment and inflation, where high inflation correlates with low unemployment and vice versa.
- 💡 The reasoning behind the Phillips curve is that high employment leads to increased leverage for workers, prompting employers to raise wages, which in turn increases buying power and demand for goods and services.
- 🔄 Increased demand, when coupled with full capacity utilization, can lead to price increases, as there is more demand than supply, causing inflation.
- 📉 The 1970s in the US saw an exception to the Phillips curve with stagflation, a period of high inflation and high unemployment.
- 🛑 A supply shock, particularly in oil, is often cited as a cause of stagflation, as it increased the cost of production without increasing productivity.
- 💼 The higher cost of living due to oil prices could have inhibited demand for domestic production, leading to higher unemployment despite high inflation.
- 💡 The late 1990s saw a period of low inflation and low unemployment, which some attribute to technological improvements and increased productivity that outpaced the inflationary pressures.
- 🚀 Technological advancements such as computers, telecommunications, and the Internet contributed to a 'super productivity curve' that mitigated inflation despite increased demand and employment.
- 🤔 The Phillips curve is not a law and should be understood as a general trend with exceptions, highlighting the complexity and nuance in economic relationships.
Q & A
What did William Phillips observe in the late 1950s regarding unemployment and inflation?
-William Phillips observed a correlation between unemployment and inflation, suggesting an inverse relationship where high inflation coincided with low unemployment and vice versa.
Who initially noticed the relationship between unemployment and inflation before William Phillips?
-Irving Fisher had noticed the relationship between unemployment and inflation a few decades before William Phillips, but it became widely known as the Phillips curve due to Phillips's publication.
How does the Phillips curve illustrate the relationship between unemployment and inflation?
-The Phillips curve is a graphical representation where the horizontal axis represents unemployment percentage and the vertical axis represents inflation. It shows an inverse relationship where low unemployment is associated with high inflation and high unemployment with low inflation.
What are the implications of high employment and low unemployment according to the script?
-High employment or low unemployment implies a high utilization of the labor market, giving workers more leverage to demand higher wages, which can lead to increased buying power, demand for goods and services, and ultimately higher inflation.
How does increased demand for goods and services due to higher wages affect the economy?
-Increased demand for goods and services due to higher wages can lead to a higher utilization of all factors of production, including labor, which can further lower unemployment and cause prices to rise due to increased demand outstripping supply.
What is stagflation and how did it occur in the 1970s in the US?
-Stagflation is an economic condition characterized by high inflation and high unemployment simultaneously, which contradicts the Phillips curve. In the 1970s, the US experienced stagflation, often attributed to a supply shock in oil prices, which increased the cost of production and drove up prices without increasing productivity.
What economic phenomenon in the late 1990s contrasts with the stagflation of the 1970s?
-In the late 1990s, the US experienced a period of relatively low inflation and low unemployment, which was attributed to significant technological improvements and increased productivity that outpaced the inflationary pressures.
What factors can cause exceptions to the Phillips curve relationship between unemployment and inflation?
-Exceptions to the Phillips curve can be caused by various factors such as supply shocks, structural economic issues, or external events that affect the cost of living and productivity without necessarily impacting the labor market in the expected way.
Why is it important to consider the nuances and complications in economics when observing correlations like the Phillips curve?
-It is important to consider nuances and complications in economics because economic relationships are often influenced by multiple factors and can be affected by unforeseen events or changes in the economic environment. This understanding helps to avoid oversimplification and misinterpretation of economic data.
How does technological improvement impact the relationship between unemployment and inflation as discussed in the script?
-Technological improvement can disrupt the typical relationship between unemployment and inflation by increasing productivity and efficiency, which can absorb increased demand and buying power without leading to inflation, as was seen in the late 1990s.
What does the script suggest about the certainty of economic theories and their applicability?
-The script suggests that while economic theories like the Phillips curve can provide valuable insights, they are not absolute laws and their applicability can vary depending on the specific economic conditions and external factors at play.
Outlines
📈 The Phillips Curve and Inflation-Unemployment Relationship
The script discusses the Phillips Curve, a concept that emerged from observations made by William Phillips and Irving Fisher about the correlation between unemployment and inflation. The video describes a graphical representation where unemployment is plotted on the horizontal axis and inflation on the vertical axis. The relationship is generally inverse, suggesting that periods of high inflation are associated with low unemployment and vice versa. The script explores the dynamics of this relationship, such as how high employment can lead to increased wages and buying power, which in turn can increase demand and production, leading to higher prices. However, it also points out that this relationship is not always clear-cut, as there can be complex interactions and external factors at play.
🚨 Exceptions to the Phillips Curve: Stagflation and Technological Advancements
This paragraph delves into exceptions to the Phillips Curve relationship, specifically highlighting the economic phenomenon of stagflation, which occurred in the 1970s in the United States. Stagflation is characterized by high inflation and high unemployment, contradicting the typical inverse relationship. The script mentions supply shocks, such as the oil crisis, as a contributing factor to stagflation, as it increased production costs and prices without enhancing productivity. The video also contrasts this with the situation in the late 1990s, where both low inflation and low unemployment were observed, attributed to significant technological advancements that increased productivity and prevented the typical inflationary pressures. The paragraph emphasizes the complexities and nuances of economic relationships, suggesting that while patterns like the Phillips Curve can provide insights, they are not absolute laws and can be influenced by various factors.
Mindmap
Keywords
💡Phillips Curve
💡Unemployment
💡Inflation
💡Labour Market
💡Wages
💡Demand
💡Utilization
💡Stagflation
💡Supply Shock
💡Technological Improvement
💡Productivity
Highlights
In the late 1950s, William Phillips observed a correlation between unemployment and inflation.
Irving Fisher noticed the relationship between unemployment and inflation a few decades before Phillips.
The Phillips curve suggests an inverse relationship between unemployment and inflation.
High inflation is associated with low unemployment, and vice versa.
The Phillips curve is based on empirical observations rather than a clear causal relationship.
Low unemployment can lead to higher wages due to increased leverage for workers.
Increased wages can boost workers' buying power, leading to higher demand for goods and services.
Higher demand can lead to increased utilization of production factors, further lowering unemployment.
Full capacity utilization in the economy can result in price increases due to higher demand.
Workers may demand higher wages to offset the increased cost of living caused by inflation.
The cycle of high employment and wage increases can perpetuate itself, leading to a continuous cycle.
Stagflation in the 1970s in the US was an exception to the Phillips curve, with high inflation and high unemployment.
Supply shocks, such as the oil crisis in the 1970s, can cause stagflation by increasing production costs.
The negative feedback loop of high prices and cost of living can inhibit demand for domestic production.
Structural reasons may prevent efficient allocation of resources and employees, contributing to stagflation.
The late 90s saw a period of low inflation and low unemployment, contrary to the typical Phillips curve dynamics.
Technological improvements and increased productivity in the late 90s helped to prevent inflation despite increased demand.
Economic principles like the Phillips curve are generally true but can have exceptions due to various factors.
Transcripts
Browse More Related Video
Segment 207: Stagflation in the 1970s
Introduction to inflation | Inflation - measuring the cost of living | Macroeconomics | Khan Academy
Did Thatcher Ruin or Save the UK Economy?
Why High Inflation Has Lasted for So Long | WSJ
Why many Americans feel unhappy about the economy despite indicators of improvement
The Great Labor Shortage Crisis | Economics Explained
5.0 / 5 (0 votes)
Thanks for rating: