MACRO ASSIGNMENT

UDIT RAJ SINGH

FYA
A050

SECTION 1
PHILIPS CURVE

In section our basic objective was too find out that whether the Philips curve holds or not.
Philips curve is basically as curve which shows or depicts a negative or inverse relationship
between unemployment and inflation in a country. It states that any nation has to face a trade
off between Low Unemployment and Low Inflation Rates, and that to achieve one the nation
has to face the problem with other. The explanation given for it is that with economic growth
there is a rise in the prices which is basically inflation, due to the rising of prices the producers
off different commodities are incentivized to produce more and increase their output this leads
to more demand for labour and hence a higher employment (or a low unemployment level) and
the inverse of this situation is also true. So, it states that the firm in order to decrease one must
let the other one free. But this theory has been under the gun for quite some time and specially
after the appearance of phenomena like stagflation in which there is a increase of both
unemployment and prices and which was unable to be explained by the Philips curve.
In my research I chose Philippines for research, and obtained a scatter plot diagram and also
the correlation between the unemployment and the inflation rates for both short as well as long
run. (for inflation we have used the CPI)

OBSERVATIONS
SHORT RUN (DATA AQUIRED FROM CENTRAL BANK)
YEAR: 1991-2011
For short run we were able to obtain a data for CPI from the central bank site of Philippines
from 1991-2011, first we found the correlation between the two components, and it came out
to be:
-0.791086528
Which clearly states that there is a strong negative relationship between the two components
and hence supports the Philips curve.
Then came the scatter plot which clearly showed a shape similar to that of a Philips curve and
hence further supports it:

Phillips Curve (short run)

200.0
180.0
160.0
140.0
120.0
CPI

100.0
80.0
60.0
40.0
20.0
0.0
0 2 4 6 8 10 12 14
Unemployment Rate

LONG RUN (DATA AQUIRED FROM WORLD BANK)

YEAR: 1977-2017
For long run I got the data from World Bank for the duration 1977-2017, and similar to the
short run case we found the correlation between the two components again which came out to
be:
-0.415558977
After looking at the value we see that though there is still a negative relationship between
Unemployment and CPI, the value of correlation has decreased which means that in the long
run their relationship becomes weak.

After wards as I plotted the scatter plot graph what I observed was that as compared to short
run the shape of the graph still resembled that of a Philips curve it was flatter than the former.
So, we were able to conclude that there is a weakening of the relationship between the
Unemployment rate and inflation rate in the long run.

Phillips Curve (long run)

200
180
160
140
120
CPI

100
80
60
40
20
0
0 2 4 6 8 10 12 14
Unemployment Rate
EXPLANATION
Globalization can be used to explain the flattening of the Philips curve, we can say so because
of three main reasons:
1. Due to increased competition from abroad, businesses have less scope to raise prices
when demand rises.
2. Increased trade and investment flows have made goods prices less sensitive to domestic
demand pressures.
3. Labour mobility has also increased in recent years. This could lead to further flattening
of the Phillips curve if it results in declining sensitivity of service sector wages and
prices to domestic demand shifts. Workers may not press for higher wages when the
domestic labour market tightens for fear that their jobs may be taken by foreign labour.
4. A central bank study has highlighted a flattening of the curve over the years and may
have partly been a result of the central bank’s adoption of inflation targeting in 2002.
CONCLUSION
What we can conclude from this analysis is that, yes Philips curve is followed in the case of
Philippines, as there is a negative correlation between the Unemployment Rate and the CPI but
there is a weakening of this relationship in the long run and it is due to the fact that there have
been changes in the monetary policies adopted by Philippines which are inflation targeting,
also due to growing international trade the domestic demand pressure on prices has decreased
a lot, labour mobility has increased due to which the demand for higher wages by the labourers
has decreased as they always under a threat of losing the job to migrant workers agreeing to
work at lower prices. Increased competitiveness has contributed to weaken the correlation.

SECTION 2 (USA)

MISERY INDEX

Misery Index is the sum of the inflation rate and the unemployment rate in a country at a
particular time. The higher the Index the more misery the general public of the country feel
under the current economic situation in the country. It is an important component in finding
out or analysing how a particular government is performing in keeping the economic situations
under control and thus its citizens happy. As easy it may be to calculate the Index, it proves to
be inaccurate at many times.
I have chosen United States to test that whether there is a definite positive relationship between
the Misery Index and the Percentage of votes won by a political party. And for this I have
chosen two time periods which are 2001-2009 (Obama Administration) and 2009-2017 (Bush
Administration).
a) First, we find out the Misery Index in the United States for these particular periods by
adding the Unemployment rate and the inflation rate for that year.

Misery Index Under Bush Administration.

Misery Index Under Obama Administration.

b) What is observed by me is that in reality Misery index is found to be faulty, At times

where the ruling government should have been removed, it was able to retain power
and sometimes gain even more support, For Example in the above two examples what
we can see is that in case of Bush Administration even though Misery Index jumped
from 7.30% to 8.70% (2001 to 2004) There is still an increase in the percentage of votes
(47.90% to 50.70%) secured by Bush, while in case of Obama the situation is
completely inverse as when the Misery Index falls down (8.2% from 12.6%) there is a
decrease in the percentage of votes (52.90% to 51.10%), which is the opposite of what
should be happening in this case. The Misery Index is none the less very helpful in
finding out the satisfaction of the public under the govt. at that time and though it might
not be accurate, it has been confirmed through research that value of Misery Index does
give a hint on the popularity of the government among the people and helps in
prediction of the outcomes in an election. and it is due to its help, that in United States
these election predictions have been correct 9 out of 12 times.
 (Different colours indicate the country under different precedency.)

Then I took some election years precisely 1980-2016, and found the values of the
Misery Index in the year and the percentage of votes secured by the winning party or
candidate. And what I observed that there were cycles where Misery Index phenomena
was successful for example in 1980 the Misery Index was 19.70% and, in 1981, a new
govt. was elected (Ronal Regan) with a vote percentage of 50.70%, then under his
precedency the Misery Index fell to 11.20% in 1984 and as the we would have predicted
Ronald Regan was again elected with more percentage of votes (58.80%). And even
for other cases like 1989 when the term limit of President Ronald Regan reached, and
George H.W Bush came into power, he could be president only for one term it is due
to the reason that in his tenure the Misery Index rose to 10.30% from 9.70%, and he
was removed from the office in the next elections. But still we can’t ignore the
situations we discussed in the starting of part (b) that Misery Index has been faulty at
places.

(Scatter Plot diagram between Unemployment and Inflation Rate, Positive but weak correlation.)
 So, after making a scatter plot diagram between Unemployment rate and Inflation rate,
and looking at the data what I could conclude was that Misery Index is not the perfect
measure to predict the outcomes of an election but it still is quite effective if we want
to get only a rough Idea on how the government is performing.

(c) Some reasons that we can say for Misery Index being inaccurate is:

1. That one of its components, the Unemployment rate is a lagging indicator which
pushes the Index up even if the recession is over.
2. Some researchers believe that the Index understates the Unhappiness derived
from higher unemployment levels because they feel that in an economy
Unemployment affects the satisfaction of people more than inflation due to the
increase in the federal reserve policy effectiveness to fight or mitigate the
inflation. So, it is wrong to weigh both of the components as of equal impact.
3. The original Misery Index can also be flawed because it also takes into account
two components and ignore the others like, level of government spending, Bank
lending rates, Various government welfare programmes, Popularity of the
President due to other reasons (Winning or ending a war,) and etc.
4. The unemployment figures may underestimate the levels of “hidden
unemployment or part time working.” For example, in UK and US in 2011
unemployment has fallen due to more flexible labour markets. Employment has
risen but the jobs that were created by it were low paid and on temporary
contracts.

CONCLUSION
What we have concluded from this report is that Philips curve is a very simple way to
understand the relationship between unemployment and inflation, but due to its this simplicity
it has many limitations which make its imperfect for a higher research level.
Then when we discuss about the Misery Index, we see that how though again it is very easy
like the Philips curve, it has its own problems associated with it which again demand for some
improvements in it like Hanke’s Misery Index, Barro’s Misery Index and etc, as it needs to
take in more Economic Indicators.
Hence, the modern world has become so much complex that the old measures and relationships
between Economic Indicators tend to fail if not improved or modified with time.

 Note: As you can see I have used Wikipedia to obtain the percentage of votes won by
the candidate in different election cycles, just to make my obtained information more
trust worthy I have used Encyclopaedia Britannica to double verify and check my
voting population turn out and the how many of them voted for the winning candidates.
And the information checks out.

THE END
REFRENCES
1. https://www.thebalance.com/misery-index-definition-accuracy-history-4155874
2. https://www.investopedia.com/terms/p/phillipscurve.asp
3. https://www.securitybank.com/market-information/market-research/inflation-
targeting-and-the-phillips-curve/
4. Research paper: Flattening of the Phillips Curve: Implications for Monetary
Policy, by Dora M. Iakova
5. https://www.investopedia.com/terms/t/t-test.asp
6. https://en.wikipedia.org/wiki/United_States_presidential_election
7. https://www.economicshelp.org/blog/291/unemployment/the-misery-index/
8. https://www.britannica.com/event/United-States-presidential-election-of-1996
9. https://www.britannica.com/event/United-States-presidential-election-of-2000
10. https://www.britannica.com/event/United-States-presidential-election-of-2004
11. https://www.britannica.com/event/United-States-presidential-election-of-2008
12. https://www.britannica.com/event/United-States-presidential-election-of-2012
13. https://www.britannica.com/event/United-States-presidential-election-of-2016