Monday, April 6, 2015

inflation

Philip curve fits well for demand pull inflation. But i am unable to apply the same to cost push inflation. Cost push inflation is basically due to price in factor of production. How does that impact unemployment level? If we consider labour as factor of production yes it has a bearing. But how  other factors of production impact unemployment?

*Labour is definitely a factor of production, without doubt, so that it will have a direct impact -> Higher employment-> More salaries->Higher cost

*Besides that, even for raw materials, wherever they are procured from, if their costs increase, there will be higher employment in that primary sector due to increased revenue

*Same goes for other inputs of infra and all as well. Finally there will be a trickle down effect leading to rise in prices and rise in prices anywhere will lead to more employment.

"In economics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation."
Higher Inflation -> Higher employment
Low inflation -> Less employment

You are right in saying labor as a factor of production would affect inflation.
Variants of Phillips curve are used presently as the original curve was not able to explain all the relationship between inflation and unemployment

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