Skip to main content

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
1. https://oeconomia.revues.org/138
Labels:

Popular posts from this blog

Characteristics of good tax system. (Canons of taxation)

Tax is an effective fiscal tool to influence the economy. It has also certain norms which have to be followed to make it more effective and popular. That state is a welfare state which imposes less amount of tax and collects more amount of revenue. So the tax should be effective. A good tax system should help to establish fair income distribution and socio-economic stability. According to Adam Smith, "A tax is a contribution from citizens for the support of the state." Adam Smith has given the most comprehensive and exhaustive concept of a good tax system which is known as the canon of taxation.  1 Canon of equity  A good tax should be based on the ability to pay principle of taxation, and it has to assure social justice to all taxpayers. In general, in this canon of equity, everybody must be treated equally for tax or according to capacity or ability they should pay the tax and unequal must be treated unequally....
Read more

Teej : The Most Awaited Festival for Nepalese Women

Written By: Jaya Silwal Red, green and yellow, these are the only colors that can be seen everywhere; mostly dominated by the color red. Teej is the name of a red insect that comes out on the surface during the rainy season. The festival is said to have got its name from that very insect. That must be the reason why the whole town seems to be painted red that day. Metaphorically, you can see all the women and girls of all age groups on the streets enjoying the festival that it's not less than painting the town red. To those who don't have any idea, Haritalika Teej is one of the most-awaited and celebrated festivals of Hindu women in Nepal. This festival mostly falls on the 3rd day of Bhadra Shukla Pakshya according to the Nepali Lunar Calendar. It is a three-day-long celebration with the aim to increase the happiness, peace, prosperity, family harmony and the long life span of women's husbands or beloved. Traditionally, this festival is dedicated to Go...
Read more

Concept, meaning and function of Money

Concept and meaning of Money In general money simply refers to the currencies (notes, coins), produced by central bank of the nation. But in subject of monetary economics and financial and public economics, the concept of money isn’t this simple. Many arguments or views are given by different economists regarding the money. We considered here definition by some of the authors "In order for anything to be classed as money, it must be accepted fairly widely as an instrument of exchange." -  A C Pigou. "Money is anything that is habitually and widely used as means of payment and is generally acceptable in the settlement of debts." - G D H Cole. "Money constitutes all those things which are at any time and place, generally current without doubt or special enquiry as a means of purchasing commodities and services and of defraying expenses." - Alfred Marshal By money is to be understood "that by delivery of which debt contracts and price c...
Read more