More Irritating Details About Inflation

The Phillips Curve & Accelerating Inflation

-We know what the Phillips curve is. I'm not explaining it again.

-At Y* and U*, there is no gap inflation

-When the economy is in an inflationary gap, the BoC must validate for wage inflation

-In the 1960s, the level of wage and price adjustment began to rise for any level of output (the whole phillips curve shifted to the right)

-Why? Because the original phillips curve included only gap inflation and ignored expectation inflation (which impacts wage changes, obviously)

-This newly-shifted phillips curve is called the expectations-augmented phillips curve. There is still an inverse relation between the unemployment rate and the rate of changes of nominal wages, but with the effect of expectation inflation built into the model.

-Expectation inflation is graphically represented by the height of the phillips curve above the X axis at U*

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GROWTH ACCOUNTING

It is generally believed that labour accounts for about 2/3 of all income generated, and that capital accounts for approximately 1/3 of national income

as such, percentage-growth in potential national income is = to the percentage change in the level of technology + 2/3 * the percentage change in labour + 1/3 * the percentage change in capital

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The Neoclassical Growth Model and Steady States

THE NEOCLASSICAL GROWTH THEORY: This focuses on capital accumulation, and how it is affected by savings

One important function in the neoclassical growth theory is the AGGREGATE PRODUCTION FUNCTION. This function shows the relationship between total real output and total inputs (sort of like a "macro" version of the production function for individual firms we saw in microeconomics)

REMEMBER from the last leccture? There are three main determinants of economic growth: labour, capital, and technology. Well, with the aggregate production function, we say that output is technology times a function of labour and capital

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