Inflation and Unemployment
Indea regarding the relationship between inflation and unemployment was relatively new, approximately in the late 1950s. Systematically this relationship was just introduced by AW Phillips in 1958 from the results of a field study of the relationship between rising wage rates and unemployment in Britain in 1861 - 1957.
Curves that show this negative relationship are often called the Phillips curve (according to the name of the inventor). The curve is in line with the situation in England in the period 1861 - 1957. The year in which the unemployment rate is low is also the year in which the rate of increase in wages is high, and vice versa the year in which unemployment is high, the rate of increase in wages is low.
Policy Relating to Output
An increase in output can reduce the rate of inflation. The increase in the amount of output can be achieved for example with a policy of reducing import duties so that imports of goods tend to increase. Increasing the number of goods in the country tends to reduce prices.
Price Determination and Indexing Policy
This is done by determining the price ceiling, and based on a certain price index for salaries or wages (thus the salary / wages in real terms are fixed). If the price index rises, salary / wages are also increased.
Implications of Wisdom
Until the late 1950s the main problem of macroeconomic policy was to achieve simultaneously price stability and high employment opportunities.
But some thoughts at that time doubted the achievement of the two goals together - together. The Phillips curve can explain this pessimistic state. Price stability and high employment are two things that cannot happen together.
Basic theory
The Phillips curve is obtained solely on the basis of empirical studies, there is no theoretical basis. Lipsey in 1960 tried to fill the basis of his theory. For this purpose he uses as a basis for his explanation the theory of the labor market.
Thus, the natural rate of unemployment (UN) is a rate of unemployment in which there is wage stability (W = 0). There are several Lipsey statements about the Phillips curve using the labor market theory into two, namely, first, supply and demand for labor determine the wage level, second the rate of change in the wage rate is determined by the amount of excess demand for labor.
Estimation (Expectation)
This forecast or expectation problem arose in the mid-1970s and was a breath of fresh air in macroeconomic development. The trade-off between inflation and unemployment is questionable. The oil crisis that occurred in the mid-1970s led to what is called stagflation (inflation and inflation), inflation and unemployment rising together.
Adaptive Estimation (adaptive expectation)
Before the mid-1970s the dominant theory in the reduction of these expectations was adaptive. According to this theory the expected price will be based on past prices. If the current estimated price is not the same as the actual actual price, the individual will use the error in this estimate to improve his estimate in the future.