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| Introduction: | | | | 9.50% |
| Unemployment can be defined as the number of | | | | The diagram below shows the historical inflation level |
| people in the economy who are willing to work but | | | | in the UK |
| cannot find a job, the rate of unemployment is | | | | From the above graph it is clear that there has been |
| measured by getting the number of people in the | | | | a decline in inflation level from the year 1990 when |
| economy that are jobless and are between the age | | | | the inflation level was very high, there has also been |
| of 16 to 65 years and this is divided by the total | | | | fluctuations in the inflation level over the years. |
| number of working force in the economy. inflation on | | | | The unemployment level for the year 1990 to 2006 |
| the other hand can be defined as the consistent rise | | | | is available at the below table shows the level of |
| in price for a prolonged period of time in the | | | | unemployment in thousands |
| economy, this rise in price include all the goods and | | | | 1990 |
| services in the economy and in most cases inflation | | | | 2004 |
| will lead to a recession in the economy. | | | | 1991 |
| The Phillips curve is a theoretical perspective of the | | | | 2442 |
| relationship that exist between inflation and | | | | 1992 |
| unemployment, the Phillips curve depict that when | | | | 2796 |
| inflation rises then the rate of employment is high | | | | 1993 |
| and if inflation is low in the economy then the rate of | | | | 2953 |
| employment is low in the economy. Keynes on the | | | | 1994 |
| other hand tried to explain the causes of inflation as | | | | 2750 |
| cost push and demand pull, regarding cost push the | | | | 1995 |
| inflation is caused by the increase in wage rate in the | | | | 2470 |
| economy. Demand pull inflation is as a result of | | | | 1996 |
| increased demand which exceeds the aggregate | | | | 2344 |
| supply. | | | | 1997 |
| Inflation and unemployment in the UK: | | | | 2045 |
| According to the Phillips curve employment and | | | | 1998 |
| inflation are related in that when the rate of inflation | | | | 1783 |
| increases then the rate of employment will also | | | | 1999 |
| increase, when inflation decreases then the Phillips | | | | 1759 |
| curve depict that the level of employment in the | | | | 2000 |
| economy will also decrease. Below is the Phillips curve: | | | | 1638 |
| From the above diagram when inflation is high then | | | | 2001 |
| the rate of unemployment is low and when the | | | | 1431 |
| inflation level is low then the rate of unemployment is | | | | 2002 |
| high. | | | | 1533 |
| Data on historical data regarding the UK inflation level | | | | 2003 |
| is retrieved at , the historical data on uk inflation from | | | | 1479 |
| 1990 to 2006 is as follows in the table below and the | | | | 2004 |
| graph also represents the inflation level over the | | | | 1430 |
| years. | | | | 2005 |
| Year | | | | 1429 |
| Inflation | | | | 2006 |
| 2006 | | | | 1660 |
| 3.20% | | | | This can be represented in a graph as follows: |
| 2005 | | | | We can therefore construct a Phillips curve using the |
| 2.80% | | | | above information to find out whether an increase in |
| 2004 | | | | inflation level will lead to an increase in employment; |
| 3.00% | | | | this is done by representing the graph as follows: |
| 2003 | | | | The above diagram shows the levels of employment |
| 2.90% | | | | and inflation, however it does not represent the |
| 2002 | | | | Phillips curve for the recent years, and this can be |
| 1.70% | | | | explained by the theory of natural unemployment by |
| 2001 | | | | Milton Friedman. Milton Friedman agued that increased |
| 1.80% | | | | inflation will lead to increased unemployment levels. |
| 2000 | | | | According to Milton Friedman there exist a level of |
| 3.00% | | | | unemployment which he referred to as natural |
| 1999 | | | | unemployment, natural unemployment exist in an |
| 1.50% | | | | economy and he stated that by increasing levels of |
| 1998 | | | | inflation will not definitely lead to high employment |
| 3.40% | | | | levels because increased inflation may also lead to |
| 1997 | | | | higher unemployment levels and this is what he |
| 3.10% | | | | referred to as natural unemployment. |
| 1996 | | | | Conclusion: |
| 2.40% | | | | According to the above discussion on inflation and |
| 1995 | | | | unemployment, Phillips curve depict that an increase in |
| 3.50% | | | | inflation will lead to a decrease in the unemployment |
| 1994 | | | | level in the economy. In the centrally Milton Friedman |
| 2.40% | | | | in his theory on natural unemployment stated that an |
| 1993 | | | | increase in the inflation level will lead to an increase in |
| 1.60% | | | | unemployment level, this is because the economy has |
| 1992 | | | | to have that portion of unemployment which is |
| 3.70% | | | | referred to as natural unemployment. |
| 1991 | | | | |