Economic policies are necessary because high rates of employment and low rate of inflation
do not come up automatically in a free market economy. In fact changes in inflation rate are
inversely related to rate of unemployment as can be shown in the following diagram.
Phillip Curve shows the trade-off between unemployment and inflation. To achieve low unemployment level, we have to be ready to suffer high
inflation rate.
From the diagram it is clear that countries cannot attain zero level of inflation and
unemployment at anytime. There will always be a combination of the two that would be
favourable at one time. When inflation rate is high, rate of unemployment is low and vice-
versa.
- This calls for well planned policy actions to achieve an acceptable level at inflation
and unemployment.
- At times there may be high level of inflation and employment meaning that Phillip‘s
has shifted to the right.
Reasons for the shift are:
(i) Increased size of labour force due to population growth.
(ii) Low rate of manpower utilization high level of unemployment.
(iii) Low rate of economic growth. Low economic growth implies that when supply is
less than the demand the prices go up hence unemployment.
(iv) Lack of technological know-how – low output.
Therefore economic policy is essential for strong economic growth and development. The
level of employment and prices in an economic depends on level of aggregated demand and
level of output valued at prevailing prices. i.e. Employment = f (Output, expenditure).
NatalieR answered the question on
June 21, 2022 at 07:24