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Phillips Curve 1 Overall concept, movements along - YouTube
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- Okay.
In this series
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of video lectures
we are going to go ahead
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and talk about what's called
the Phillips Curve.
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And the Phillips Curve is
something
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that economists use to look
at the relationship between
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unemployment and inflation
because those are two things
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that people care about a lot.
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You know, if you sort of ask
people how the economy is doing,
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likely they would sort
of look at these two things
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first to think
about how the economy is doing.
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And the Phillips Curve is
typically going to be a graph
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that looks something like this.
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And this was all sort
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of discovered just
as a sort of fact
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before people had a real good
theoretical explanation for it.
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So it was discovered
as an empirical fact
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before people had a good
explanation.
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And in particular
what people noticed
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was when we had relatively
high unemployment,
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we tended to have relatively
low inflation.
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And when we tended to have
relatively low unemployment,
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we tended to have relatively
high inflation.
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And roughly this point over here
corresponds to a recession,
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and this point over here
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corresponds
to some kind of boom.
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And, you know, there might
have been a whole series
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of different observations here,
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and the Phillips Curve
would be sort of the line
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that passes best
through that cloud of points.
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So this was all discovered in
the early or mid 20th century.
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So early 1940's to 1950's.
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So this is sort
of early Keynesian period.
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So Keynesian economics
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really gets invented
during The Great Depression
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and rises into prominence
after the end of World War II.
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So what's going on here?
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Well, we can integrate
this with our aggregate demand,
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aggregate supply framework.
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So remember an aggregate demand,
aggregate supply model.
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We have the overall price level
on the vertical axis there,
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and GDP on the horizontal
access here.
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and let's suppose we think about
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long-run aggregate
supply being at this level,
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and then we're going to go ahead
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and have a short
run aggregate supply curve
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and an aggregate demand curve,
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and then we can go ahead
and think about down
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in this corner what's going
on with the Phillips Curve.
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So remember that if GDP equals
long run aggregate supply,
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then unemployment
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equals the natural rate
or NAIRU.
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So this point A,
our Goldilocks point
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here corresponds to
unemployment equal to its NAIRU.
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And typically
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the economy experiences some
background level of inflation,
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say three percent.
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And let's set posed
that this NAIRU--
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this NAIRU unemployment rate is
six percent.
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So the point A in this diagram
is this point A in that diagram.
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If there is an increase
in aggregate demand,
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then, of course,
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what happens is, prices rise.
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So the inflation rate is higher.
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And there's also
an increase in GDP.
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And when there's
an increase in GDP,
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firms hire more workers
to produce that extra output.
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So unemployment goes down,
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say from six percent
to four percent.
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So this point B
in this diagram corresponds
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to this point B in that diagram.
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If there had been a fall
in aggregate demand instead,
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then we would
have had a fall in GDP,
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thus a rise in unemployment,
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say to eight percent,
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and the price level
would have fallen.
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So-- so inflation
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would have been lower,
say one percent.
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So this point C
in the aggregate demand,
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aggregate
supply model diagram corresponds
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to this point C
in the Phillips Curve model.
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So key thing here,
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changes in aggregate
demand cause movements
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along the Phillips Curve.
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And just to be clear
because we're going to make
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this more complicated
in just a second,
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the short run Phillips Curve.
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And in particular an increase
in aggregate demand
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causes us to move left
along the Phillips Curve,
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and a decrease in aggregate
demand causes us to move right
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along the Phillips Curve.
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