The Samuelson and Slow Modification

The Samuelson and Slow Modification

Samuelson and Slow (1960) modified the Phillips curve so that it represents the relationship between rate of inflation and rate of unemployment. The link between wage inflation and price inflation was established through markup equation which may be stated as below:
P = (1 + a) WN/Y ……………… (1)
Where,
P = general level of price
W = money wage rate
N = number of employment
Y = real output
a = constant profit margin

In this above equation WN/Y denotes the unit labor cost – the cost of labor per unit of output. Using the concept of labor productivity (p = Y/N) equation (1) can be written as,
P = (1 + a) W/p

Differentiating the equation after natural log transformation we will get,
π = gw – λ ……………….. (2)

Here, inflation rate (π) is equal to difference between rate of growth in money wage rate (gw) and the rate of growth in labor productivity (λ).

Further, let us assume that Phillips curve is of the following form.
gw = πe + bu-1 + βλ ……………………………… (3)
Where,
πe = Expected inflation
u-1 = Degree of demand pressure in labor market

Combining equation 2 and 3 we will get,
π = πe + bu-1 – (1- β) λ ……………………………… (4)

It states that inflation depend upon expected rate of inflation (πe), excess demand pressure in labor market (bu-1) and the term (1 - β) λ. The last term denotes the portion of the growth in labor productivity that is not transformed in money wage.

Thus modifying the Phillips curve, Samuelson and Slow establish the inverse relationship between rate of inflation and unemployment. They recommend the Phillips curve to policy makers as an instrument to formulate the policy program with alternative combination of inflation and unemployment rate because there exists trade off between these variables.

In a conclusion we can conclude the Neo-Keynesian theory of inflation as such that inflation is the consequences of excess demand in labor market or disequilibrium in labor market. Growths in productivity of labor and expected inflation are other explanatory variables of inflation.

References

Decomposition or sources of high-power money

Decomposition or sources of high-power money (H) with the help of the balance sheet identity of the central bank.
High-power money (H) is the currency (notes, coins) produced by the central bank that consists of the currency (C) held by people in their hands or pockets, total cash reserve (R) of BFIs and other deposits of government, government enterprises and foreign offices (OD) with the central bank. i.e H = C + R + OD It is called high-powered money as on the basis of which all BFIs create money in the form of demand deposits (DD) under the credit creation process (CC). There are many sources of (H) that can be decomposed with the help of the balance sheet identity of the central bank i.e Total assets = Total liabilities             ML + NML = FA + OPA             ML = FA – NML + OPA             ML = FA – (NML - OPA)             ML = FA – NNML Where, ML = Monetary liabilities NML = Non-monetary liabilities OPA = other physical assets FA = Financial assets NNML = Net non-monetary liabilities H …

Neo-Keynesian Approach to Inflation: The Phillips Curve

Neo-Keynesian Approach to Inflation: The Phillips Curve

Generally, Neo-Keynesian macroeconomics has the following four propositions.
i.Private sector is unstable ii.Money in the long run is neutral iii.There exists tradeoff between inflation and unemployment iv.Countercyclical policies are preferable to achieve the macroeconomic stability
Phillips (1958), using the data of Great Britain, innovated the Phillips curve which showed the negative relationship between rate of change in money wage and rate of change in unemployment. The original Phillips curve was just the empirical relationship, however, most influential theoretical interpretation steamed from R.G. Lipsey (1960). The Phillips curve appeared empirically plausible and verifiable explanation of continuously rising money wage, a phenomena which the classical labour market could not explain immediately.
The demand for and supply of labour schedules were assumed to be negative and positive function of money wage respectively. Presence …

Micro and macro economics

Interdependence between micro and macro economicsMicro and macro-economics are different in their approaches:
- Micro studies the individual units of the whole economy whereas, Macro deals with the aggregates and sub-aggregates related to the whole economy
- The objective, subjective matter, assumptions etc, of micro economics are different from those macro-economics. But micro and macro are independent.
- The objective of the study of economic can’t be fulfilled by the study of only one, micro and macro.
- They are independent on each other because the parts affect the whole and the whole effects the parts.
- A general economy covers the both micros and macros.
- It should explain prices, output, incomes, behavior of individual firm and industry and the aggregates of the individual variables.   Dependence of micro on macro economics-Micro economics analyzes problem and behavior of small units of the economy. All micro economic variables are fraction of macro-economic variables. -Micro econom…