# Week 4 discussion 2 – eco342: principles of econometrics (bsk046ds) | ECO 342 Principles of Econometrics | Ashford University

The Assignment:

In figure 5-4(c) of our text, the celebrated Phillips curve is depicted.  Discuss its meaning as it relates to wages and unemployment.  Be sure to take advantage of the Tips & Hints and supplemental resources provided.

Respond to at least two of your classmates’ postings.

What Success Looks Like:

Be careful with this one!  This question is deceptively tricky! The question does not ask you to just describe the graph and its axes!  If you merely repeat the definition from the text, you will get minimal credit!  There is much more here and this ties into this week’s Problem Set.  The question does ask you to describe the relation of the variables and the way in which a relationship may be misleading because of the limitations of its sample period… and because the underlying hypothesis was incomplete.  (As a hint, keep in mind that this chapter is about multivariate regression.)

Please note that you will receive the minimum credit (“Below Expectations”) if you merely repeat the definition of the Phillips curve!  We are economists, not parrots!

Discussion 2 addresses a very important concept from economics… which is also often rather misunderstood.  I’ll provide more elaboration on the Philips curve as we progress, but in the meantime:

1) Discuss the meaning of the Philips curve “…as it relates to wages and unemployment.”  What does the Philips curve explain?  And why was it believed to explain it?  It is not enough to simply say that it shows some sort of relationship between wages and unemployment!  You must look deeper!  You need to provide more detail than that.

As a clue, this Week is all about figuring out whether or not you have enough variables or not.  As another clue, the Philips curve as postulated in the 1960s is an example of correlation not being causation!  The trade-off postulated by Philips does not exist!  Why?  Well, back to my clue, maybe there is another variable that should be considered.  This discussion rewards research, on the internet or elsewhere.

The Phillips Curve demonstrates that bad economics can be politically popular… and economically disastrous.  Although American politicians especially took comfort in the Phillips Curve as they attempted to manage employment and inflation in the ’60’s, they were entirely flummoxed when the economy entered “stagflation” in the ’70’s.  In stagflation, unemployment and inflation were both high.  The “misery index” (unemployment rate added to inflation rate) was created to gauge the pain of this situation.

The inability of the Carter Administration to master this apparent paradox provided Ronald Reagan with some of his most compelling rhetoric and set the stage for President Reagan’s election in 1980.  When I was an undergrad, economists believed that stagflation could only be conquered through a protracted depression or perhaps not at all… probably proving that they were smarter than they were useful.  Interestingly, the limited period examined by the text (as analyzed by the British economist responsible for this eponymous curve) perhaps inadvertently shows how one can reach a flawed conclusion from history if one does not look at enough of the history… and that correlation indeed does not imply causation!

– – – – –

Thompson, P. (2011). Inflation and Unemployment. 88-301 Intermediate Economics, CarnegieMellonUniversity. Retrieved on May 8. 2011 from http://www.google.com/imgres?imgurl=http://www.andrew.cmu.edu/course/88-301/phillips/phillips_curve.gif&imgrefurl=http://www.andrew.cmu.edu/course/88-301/phillips/phillips.html&h=300&w=400&sz=50&tbnid=Y2Q9CFtDWRxdMM:&tbnh=93&tbnw=124&prev=/search%3Fq%3Dphillips%2Bcurve%26tbm%3Disch%26tbo%3Du&zoom=1&q=phillips+curve&hl=en&usg=__PStVhW9uxt6jS95Szv49oIcz4OE=&sa=X&ei=fSXHTaDzCaXv0gHtj_GxCA&sqi=2&ved=0CEEQ9QEwAg

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