The Phillips Curve

The Phillips Curve illustrates the inverse relationship between inflation and unemployment in an economy, as originally observed by A.W. Phillips in 1958. For OCR A-Level Economics, this topic is central to understanding macroeconomic trade-offs and policy dilemmas. The short-run Phillips Curve (SRPC) shows that as unemployment falls, inflation tends to rise due to increased wage pressure and aggregate demand. This relationship is crucial for evaluating demand-side policies, such as monetary or fiscal expansion, which can reduce unemployment but at the cost of higher inflation.

The long-run Phillips Curve (LRPC) challenges this trade-off by incorporating expectations. In the long run, the LRPC is vertical at the natural rate of unemployment (NRU), implying no permanent trade-off between inflation and unemployment. This is because workers and firms adjust their inflation expectations, shifting the SRPC outward. The concept of the non-accelerating inflation rate of unemployment (NAIRU) is key: if unemployment falls below the NRU, inflation will accelerate. Understanding this helps students analyse the impact of supply-side policies, which can shift the LRPC leftward by reducing the NRU.

The Phillips Curve fits into the wider OCR Economics syllabus by linking to aggregate demand and supply, inflation, unemployment, and macroeconomic policy. It is essential for evaluating policy conflicts, such as the 'stop-go' cycles of the 1960s-70s and the disinflation of the 1980s. Students should be able to draw and interpret SRPC and LRPC diagrams, explain shifts due to expectations, and apply the model to real-world scenarios like the UK's post-2008 recovery or the recent cost-push inflation.