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Abstract:
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In an economy people and industries, demand the supply of inputs, services and goods.
However the sophisticated relationship between inputs, goods, and the price attached to the
goods and inputs is a puzzle as presented by Knotek (2007). He argues that from the beginning
of 2003 through first quarter of 2006, real gross domestic product (GDP), a measure of the
country’s economic success, determined from its output, of the United States (US) grew at an
average of 3.4 percent annually and unemployment fell as expected. Over the course of the
next year unemployment continued to go down regardless of a slow growth to less than half of
earlier growth rate in the economy. The expectation of policy makers and economists was that
of increase in unemployment, which was not the case. Further to that Nugent (1982) in
studying the economy of Latin America confesses of the controversy that exists in the
relationship of the same unemployment and the increase in price levels, commonly known as
inflation. He presents that the relationship is unstable, as was the conclusion in the latter case.
Same was the finding of Case and Fair (1999) on US economy for 1960-1997, with the
breakdown of the relationship in 1970. He then calls it one of the more controversial subjects in
macroeconomics during the last two decades. Nevertheless Knotek states that the relationship
between unemployment and output enjoys empirical support and Friedman claims that the
relationship between unemployment and inflation plays the important role of the “missing
equation”. The former relationship is what has come to be known as Okuns law taking after the
early 1960s economist Arthur Okun, while the latter Phillips curve, named after the finding of
the economist Phillip in 1958. The two forms the major discussion of this study with special
reference to Malawi, there advantages and limitations in their applicability based on empirical
evidence. |