Nirad Inamdar, Ph.D. Student Economics and Business Environment
The Phillips curve is a mathematical study of the relationship between inflation and unemployment in an economy. We know that for any place or region — and consequently, for its government — some of the primary goals are:
- high Gross Domestic Product (GDP) per capita
- high trade deficit (more exports than imports)
- low percentage of below poverty line (BPL) families
- low unemployment
- low inflation, especially of essential goods
However, achieving all of these goals at once is the economic equivalent of Utopia. It requires a veritable balancing act to manage these goals because they are conflicting in nature. Every year, administrators face a trade-off. One of these is between inflation and unemployment. Intuitively, we understand that to reduce unemployment, the government gives incentives and creates more jobs. While this increases the GDP output, it also reduces the supply of labor in the market. Ironically, the reduction in the available workforce makes labor costly and wages increase. This causes inflation.