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 = π^e + bu^-1 + βλ ……………………………… (3)

Where,

π^e = Expected inflation

u^-1 = Degree of demand pressure in labor market

Combining equation 2 and 3 we will get,

π = π^e + bu^-1 – (1- β) λ ……………………………… (4)

It states that inflation depend upon expected rate of inflation (π^e), 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
1. https://oeconomia.revues.org/138

Life Cycle Hypothesis

This theory was developed by Franca Modigliani, Nobel Laureate of 1985, Richard Brumberg and Albert Ando in 1950s and 1960s. It is called MBA hypothesis. According to this theory, consumption is a function of the lifetime expected income of the person. The consumption depends on the resources available to the person, the rate of return to the capital, the spending plan and the age at which the plan is made. It depends on: i. Resources ii. Spending plan iii. Rate of return on capital iv. The age at which the plan is made According to Modigliani the point of departure of the life cycle model is the hypothesis that consumption and saving decision of household at each point of time reflects more or less conscious attempt to achieve the preferred distribution of consumption over the life cycle. Subject to the constraint imposed by the resources occurring to the household over...

Project Authority

Authority is a special power of making decisions regarding any problem. On the other hand, the Authority is the power to take and implement the management decision. It is also the right to influence others and to use resources. It is the legal power to edit the activities of the project or organization. Each project is formal to achieve its predetermined objectives within the project constraints i.e. time, cost and equality performance. Top management delegates the project authority to project manager and others (for risky project, more authority is required whereas less risky project many require less authority). Project authority creates the project structure. It also facilities coordination between the project manager and other managers as well as organization manager and project manager. Authority is the legal power on the basis of which managers can provide a reward as well as punishment. In project: Project authority is shifted vertically downward from...

Brief review of UN, UNIDO, OECD and world bank project evaluation techniques

The UNO was formally established aiming at achieving to establish corporation and peace and to develop international cooperation between various nations of the world effectively in Oct. 24, 1945. The UNO was established as a powerful international organization for the development of different nations after the world war 1st and 2nd. This organization is doing its important works by spreading its helping hands even today in the field like education, health, social activities, culture, and science, etc. It has some agency: World Bank UNIDO (United Nations Industrial Development Organization) OECD (Organization for Economic Co-operation and Development) World Bank is a project evaluation technique of the world bank. It was established in Dec 27, 1945, Prime financial of organization of UNO. It was established to eliminate poverty and economic problems. The world bank applies the following techniques while monitoring and evaluating its loans prov...

Lato-kosero

Search This Blog