The paper "Business Analytics" is a decent example of a Business assignment. This paper intends to analyze the proposition that there exists a correlation between the rate of inflation and the level of unemployment in an economy. The first section will study the wage inflation rate plotted against the unemployment rate then proceed to give the price inflation plotted against the unemployment rate. Analysis of the Philips curve in both the short-run and long-run will be conducted. Statistical analysis of Consumer Price Indices and the unemployment rate in the UK will be studied.
The relevant data for the analysis is sourced from the Office for National Statistics. Part of the analysis will include correlation, scatter plot, and hypothesis testing. Lastly, the paper will present the significance of the statistical analysis. The Philips Curve Phillips curve relates inflation to unemployment. According to the curve, inflation and unemployment have an inverse stable relationship (Cashell, 2004). It means that wages tend to rise rapidly in response to lower rates of unemployment. A. W Philips developed a research paper that plotted the unemployment rate against the rate of change of money wages.
Data that was utilized by the researcher was for the United Kingdom from 1861 to 1931, which effectively yielded a curve of wage inflation – unemployment trade-off (Arnold, 2013). This curve is evident in figure 1. It is important to note that low unemployment is accompanied by excess demand, which causes demand-pull on wages (Jain, 2006). On the opposite side, high unemployment is followed by a diminishing wage. Figure 1: Original Philips Curve In later years, a wage inflation rate was substituted with the price inflation rate plotted against unemployment rates.
The result was an inverse relationship between price inflation and unemployment as shown in figure 2. Figure 2: Philips Curve In a study by Mankiw (2011), there is no stable short-run Phillips curve. It means that each short-run Phillips curve indicates some level of the expected inflation rate. The Short-run Phillips curve intersects the vertical long-run Philips curve at the expected rate of inflation. In the short run, expectations remain unchanged. However, as expectations change, the outcome will be a shift in the short-run Phillips curve. The long-run situation is that price expectations are updated and wage negotiations take into consideration the new information.
Arnold, RA 2013, Economics, Mason, OH, Cengage Learning.
Cashell, BW 2004, Inflation and Unemployment: What is the connection? Washington DC, Congressional Research Service.
Jain TR 2006, Macroeconomics Management, New Delhi, V.K Publications.
Mankiw, G 2011, Principles of Economics. Mason, OH, Cengage Learning.
Office for National Statistics 2015, Consumer Price Indices, viewed 19 April 2015, www.ons.gov.uk/ons/datasets-and-tables/data- selector.html?cdid=D7BT&dataset=mm23&table-id=1.1.
Office for National Statistics 2015, Unemployment rate, viewed 19 April 2015, http://www.ons.gov.uk/ons/taxonomy/index.html?nscl=Unemployment+Rates.
The World Bank Group 2015, Consumer Price Indices, viewed 19 April 2015, http://data.worldbank.org/country/united-kingdom.