The State of Inequality in India Report
PAPER 3 ENVIRONMRNT
Why You Should Know?
• The State of Inequality in India Report was released by Dr Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister (EAC-PM).
• The report has been written by the Institute for Competitiveness and presents a holistic analysis of the depth and nature of inequality in India.
• The report compiles information on inequities across sectors of health, education, household characteristics and the labour market.
• As the report presents, inequities in these sectors make the population more vulnerable and triggers a descent into multidimensional poverty.
• The report is a stock-taking of both inclusion and exclusion and contributes to the policy debates. The panellists for the launch included Dr Poonam Gupta, Director General, NCAER and a member of the Economic Advisory Council to the Prime Minister and Dr Charan Singh, Chief Executive at Foundation for Economic Growth and Welfare (EGROW) and Professor Suresh Babu of IIT Madras.
• The panellists made several poignant remarks on the issue as they discussed the report. Consisting of two parts – Economic Facets and Socio-Economic Manifestations – the report looks at five key areas that influence the nature and experience of inequality.
• These are income distribution and labour market dynamics, health, education and household characteristics. Based on the data derived from various rounds of the Periodic Labour Force Survey (PLFS), National Family and Health Survey (NFHS) and UDISE+, each chapter is dedicated to explaining the current state of affairs, areas of concern, successes and failures in terms of infrastructural capacity and finally, the effect on inequality.
• The report stretches the narrative on inequality by presenting a comprehensive analysis that shapes the ecosystem of various deprivation in the country, which directly impacts the well-being of the population and overall growth.
• It is a study that cuts across the intersections of class, gender, and region and highlights how inequality affects the society.
• The report moves beyond the wealth estimates that depict only a partial picture to highlight estimates of income distribution over the periods of 2017-18, 2018-19 and 2019-20.
• With a first-time focus on income distribution to understand the capital flow, the report emphasises that wealth concentration as a measure of inequality does not reveal the changes in the purchasing capacity of households.
• Extrapolation of the income data from PLFS 2019-20 has shown that a monthly salary of Rs 25,000 is already amongst the top 10% of total incomes earned, pointing towards some levels of income disparity.
• The share of the top 1% accounts for 6-7% of the total incomes earned, while the top 10% accounts for one-third of all incomes earned.
• In 2019-20, among different employment categories, the highest percentage was of self-employed workers (45.78%), followed by regular salaried workers (33.5%) and casual workers (20.71%).
• The share of self-employed workers also happens to be the highest in the lowest income categories.
• The country’s unemployment rate is 4.8% (2019-20), and the worker population ratio is 46.8%.
• In the area of health infrastructure, there has been a considerable improvement in increasing the infrastructural capacity with a targeted focus on rural areas.
• From 1,72,608 total health centres in India in 2005, total health centres in 2020 stand at 1,85,505. States and Union Territories like Rajasthan, Gujrat, Maharashtra, Madhya Pradesh, Tamil Nadu and Chandigarh have significantly increased health centres (comprising of Sub-Centres, Primary Health Centres, and Community Health Centres) between 2005 and 2020.
• The results of NFHS-4 (2015-16) and NFHS-5 (2019-21) have shown that 58.6% of women received antenatal check-ups in the first trimester in 2015-16, which increased to 70% by 2019-21.
• 78% of women received postnatal care from a doctor or auxiliary nurse within two days of delivery, and 79.1% of children received postnatal care within two days of delivery.
• However, nutritional deprivation in terms of overweight, underweight, and prevalence of anaemia (especially in children, adolescent girls and pregnant women) remains areas of huge concern requiring urgent attention, as the report states.
• Additionally, low health coverage, leading to high out-of-pocket expenditure, directly affects poverty incidences.
• According to the report, education and household conditions have improved enormously due to targeted efforts through several social protection schemes, especially in the area of water availability and sanitation that have increased the standard of living.
• It is emphasised that education and cognitive development from the foundational years is a long-term corrective measure for inequality.
• By 2019-20, 95% of schools have functional toilet facilities on the school premises (95.9% functional boy’s toilets and 96.9% functional girl’s toilets).
• 80.16% of schools have functional electricity connections with States and Union Territories like Goa, Tamil Nadu, Chandigarh, Delhi, Dadra and Nagar Haveli and Daman and Diu, Lakshadweep and Puducherry have achieved universal (100%) coverage of functional electricity connections.
• The Gross Enrolment Ratio has also increased between 2018-19 and 2019-20 at the primary, upper primary, secondary and higher secondary.
• In terms of improvement in household conditions, emphasis on providing access to sanitation and safe drinking water has meant leading a dignified life for most households.
• According to NFHS-5 (2019-21), 97% of households have electricity access, 70% have improved access to sanitation, and 96% have access to safe drinking water.
• The information available on inequality, which this report brings out, will help formulate reform strategies, a roadmap for social progress and shared prosperity.
• Recommendations like creating income slabs that provide class information, establishing universal basic income, creating jobs, especially among the higher levels of education and increasing the budget for social protection schemes have been made.
The Lancet Planetary Health
Paper 2 HEALTH
Why You Should Know?
• Pollution caused nearly nine million deaths in 2019, or about one in six deaths worldwide.
• This number has remained effectively unchanged since the previous such analysis in 2015 by the Lancet Commission on Pollution and Health, says are port published in The Lancet Planetary Health.
Major Points of Reports
• Though the number of deaths from pollution sources associated with extreme poverty (such as indoor air pollution and water pollution) fell, these reductions are offset by increased deaths attributable to industrial pollution (such as ambient air pollution and chemical pollution).
• A report by The Lancet in 2019 said that noxious air killed 1.67 million Indians in 2019, or 18% of all fatalities.
• The authors of the study conclude with eight recommendations that build on those given in the Lancet Commission on Pollution and Health.
• These include call for an Intergovernmental Panel on Climate Change (IPCC)-style science/policy panel on pollution, along side increased funding for pollution control from governments and donors, and improved pollution monitoring and data collection.
What is Pollution?
• Pollution is the introduction of harmful materials into the environment.
• These harmful materials are called pollutants.
• Pollutants can be natural, such as volcanic ash.
• They can also be created by human activity, such as trash or runoff produced by factories. Pollutants damage the quality of air, water, and land.
Causes Of Pollution
• There are numerous causes of pollution all over the world. For example, air pollution may occur from burning waste material, mining, car emissions, agriculture, and warfare. Vehicle emissions are ranked as the leading cause of air pollution in the world.
• Vehicles also lead to causing noise pollution in the world.
• Other significant environmental pollutants are chemical factories, oil refineries, big livestock farms, plastic products, pesticides, and heavy metals.
• Natural disasters such as hurricanes, flooding, earthquakes, and droughts also lead to environmental pollution.
• In rare instances, pollution leads to considerable environmental damage and fatal consequences like in case of nuclear plant accidents and significant oil spills.
Effects Of Pollution
• Environmental pollution results in diverse harmful effects on living creatures and the surroundings.
• Air pollution often leads to health problems in humans such as respiratory diseases, heart diseases, and other ailments.
• Additionally, polluted air results in acidic rain which is harmful in the soil. Water pollution is a significant cause of death in most developing countries.
• Noise pollution often results in hearing loss, stress, sleeping problems, and even high blood pressure.
• Environmental pollution caused by chemicals like lead and mercury mostly lead to developmental problems in children and health complications in adults.
• On the global scale, pollution often results in an imbalance in the ecosystem and elimination of some endangered species.
• Research has shown that pollution leads to reduced productivity for workers around the world.
URBAN HEAT ISLAND
PAPER 3 ENVIRONMRNT
Why You Should Know?
x • Around Midnight India time on May 5, NASA’s space thermometer ECOSTRESS captured an image covering 12,350 sq km northwest of Delhi and showing a stark difference in night time temperatures in urban and rural pockets.
• Red patches on the image delineated urban heat islands amid significantly cooler rural patches – with a temperature difference of around 20°C.
URBAN HEAT ISLAND:
• This is a localised and temporary phenomenon when certain pockets experience higher temperatures than surrounding areas.
• The variations are mainly due to heat getting trapped in localities that resemble concrete jungles: Greener rural localities often record cooler temperatures than urban areas.
WHY GREEN HELPS:
• Transpiration is a natural way of heat regulation that in volves roots absorbing water from soil, before processing and releasing it in the form of water vapour.
• As urban areas lack sufficient green cover, heat regulation is either absent or man-made. Also, cities with buildings constructed using glass and concrete, all dark-coloured materials, attract and absorb higher heat content.
• On May 15, Najafgarh and Mungeshpur in Delhi recorded maximum temperatures of 49.2°C, while Mayur Vihar (45.4°C), Lodhi Road (45.8°C), Palam (46.1°C), and Ayanagar (46.8°C) were cooler.
• ECOSTRESS found nighttime temperatures in Delhi and sev eral smaller villages were above 35°C, while the rural fields nearby had cooled to around 15°C.
• “This data suggests that city dwellers are experiencing considerably higher tem peratures than the average temperatures reported for their regions,” NASA said.
REDUCING HEAT LOAD:
• Increasing green cover is one way to cut heat load within urban areas. Otherways of heat mit igation include appropriate choice of con struction material, promoting terrace and kitchen gardens, and painting the terrace spaces using light colours to reflect heat.
Economy Likely to Grow 12-13% in First Quarter: ICRA
PAPER 3 ECONOMY
Why You Should Know?
• Citing the second highest business activity index reading in 13 months in April, rating agency ICRA forecast the economy to grow 12-13 per cent in the first quarter of the current fiscal.
• However, Icra has maintained its annual GDP projection at 7.2 per cent for this fiscal citing worries over inflation and the result ant RBI tightening.
• Our business activity monitor for April at 115.7 indicates that activity was roughly 16 per cent higher than the year ago (period) and pre-Covid levels in spite of the global headwinds.
• This high growth may persist in May, especially on an annualised basis, which should translate into a double-digit GDP expansion in Q1 at 12-13 per cent.
About Investment Information and Credit Rating Agency
• ICRA Limited (ICRA) is an Indian independent and professional investment information and credit rating agency.
• It was established in 1991, and was originally named Investment Information and Credit Rating Agency of India Limited (IICRA India).
• It was a joint-venture between Moody’s and various Indian commercial banks and financial services companies.
• The company changed its name to ICRA Limited, and went public on 13 April 2007, with a listing on the Bombay Stock Exchange and the National Stock Exchange.
• As of end December 2020, Moody’s Corporation owns a 51.86% majority stake.
ICRA Credit Rating
• ICRA’s credit ratings are symbolic representations of its current opinion on the relative credit risks associated with the rated debt obligations/issues.
• These ratings are assigned on an Indian (that is, national or local) credit rating scale for Indian Rupee denominated debt obligations.
• ICRA ratings may be understood as relative rankings of credit risk within India. ICRA ratings are not designed to enable any rating comparison among instruments across countries; rather, these address the relative credit risks within India.
• ICRA’s ratings in the investment grade convey the relative likelihood of default, i.e., the possibility of the debt obligation not being met as promised.
• All other ratings, including Structured Finance Ratings, reflect both the probability of default and the severity of loss on default, i.e., the expected loss against the rated debt obligation.
• Credit ratings aside, ICRA also assigns Corporate Governance Ratings, besides Performance Ratings, Gradings and Rankings to mutual funds, construction companies and hospitals.
PAPER 3 ECONOMY
Why You Should Know?
• In percentage, the gains Logged by benchmark Indices Sensex and Nifty. The 30-share BSE benchmark zoomed 1,344.63 points or 2.54% to settle at over a one-week high of 54,318.47 points with all of its constituents closing with gains.
• The broader NSE Nifty rallied 417 points or 2.63% to finish at 16,259.30 points. All the 50 stocks advanced led by steel and energy stocks.
• Among Sensex stocks, Tata Steel emerged as the lead gainer, rising by 7.62%.
About The BSE SENSEX
• The BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply SENSEX) is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange.
• The 30 constituent companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy.
• Published since 1 January 1986, the S&P BSE SENSEX is regarded as the pulse of the domestic stock markets in India.
• The base value of the SENSEX was taken as 100 on 1 April 1979 and its base year as 1978–79. On 25 July 2001 BSE launched DOLLEX-30, a dollar-linked version of the SENSEX.
Access to Bicycles
PAPER 1 INDIAN SOCIETY
Why You Should Know?
• The percentage of households in West Bengal that have bicycles – the highest in the country, as per the National Family Health Survey (NFHS-5).
• While the national average is 50.4%, U.P. holds the second rank with 75.6% of households owning a bicycle.
• Nagaland has the lowest number of households owning a bicycle at 5.5% – A government official said the top spot could be bagged because of the State government’s “Sabooj Sathi’ scheme. 1,03,97,444 students have received bicycles under the scheme.
Sabooj Sathi Scheme
• Sabooj Sathi Scheme is a free bicycle scheme which aims to provide a mode of transportation to the students who travel long distances to reach their schools but can not afford a mode of transport.
• To get the detailed information about this scheme and know how can you apply and check the beneficiary list keep reading this article.
The Buddhist Connection of Vadnagar
PAPER 1 INDIAN SOCIETY
Why You Should Know?
• Recently, Prime Minister Narendra Modi said his birthplace, Vadnagar in Gujarat, was a prominent centre of Buddhist learning centuries ago.
• The Gujarat archaeology department began excavations in Vadnagar in 2006, when Modi was Chief Minister.
• In 2014, the work was taken over by the Archaeological Survey of India (ASI). Excavation is ongoing at two sites — Vadnagar-Ambha Ghat, and near Ambaji Kotha lake.
• About 20,000 artefacts, some dating to the 2nd century AD, have been unearthed so far. Among these are an elliptical structure, a circular stupa, and a square memo rial stupa 130 cm in height and measuring 2m x 2m enclosed within a wall.
• Bowls used by Buddhist monks have been found, along with terracotta sealings inscribed with “namassarvagyaya” (salutations to The Buddha), and a face-shaped pendant with a tritatva (triple principle) symbol.
• At Taranga, about 30 km from Vadnagar, 64 natural rock shelters modified into dwellings for monks, around 40’votive’stu pas, and a large stupa on a hill have been found. Another six stupas have been found near the Taran-Dharan Mata Shrine.
• According to the Gujarat Tourism web site, Vadnagar is mentioned often in the Puranas and even in the travelogue of the great Chinese traveller Hiuen Tsang (7th century), as a rich and flourishing town.
Modi & Buddhist links
• Modi first mentioned Vadnagar’s Buddhist connection in 2014, ahead of the visit of Chinese President Xi Jinping to Gujarat.
• An article on the Prime Minister’s personal website in English and Mandarin described the “Buddhist heritage in Gujarat”, and mentioned Hiuen Tsang (Xuanzang), who is believed to have visited the state in 641 AD, along with a map of his route to Gujarat from Ujjain.
• During his visit to Japan that year, Modi visited two ancient Buddhist temples in Kyoto with then Japanese PM Shinzo Abe.
PAPER 3 INDIAN ECONOMY
Why You Should Know?
• In percentage, India’s wholesale price inflation (WPI) in April. The WPI shot up to a record high of 15.08% in April after the heatwave led to a spike in prices of perishables such as fruits and vegetables.
• This is the 13th month of double-digit inflation and arguments of a low base no longer hold.
• The last time WPI inflation was higher than this was in August 1991, when it was at 16.06%. Inflation in food articles was 8.35% while in vegetables it was 23.24%.
The Wholesale Price Index (WPI)
• The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods.
• Some countries (like the Philippines) use WPI changes as a central measure of inflation. But now India has adopted new CPI to measure inflation.
• However, United States now report a producer price index instead. It also influences stock and fixed price markets.
• The WPI is published by the Economic Adviser in the Ministry of Commerce and Industry.
• The Wholesale Price Index focuses on the price of goods traded between corporations, rather than the goods bought by consumers, which is measured by the Consumer Price Index.
• The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction.
• This helps in analyzing both macroeconomic and microeconomic conditions.
PAPER 3 INDIAN ECONOMY
Why You Should Know?
• Recently, With Wheat trucks and ships stranded at ports after a ban on wheat export, the Ministry of Commerce and Industry announcing some relaxations for traders said that the consignments handed over and registered with Customs on or prior to May 13 – the day India banned the export-shall be allowed to be exported.
• “The government has announced some relaxation to its or der dated 13th May issued by Directorate General of Foreign Trade (DGFT), Department of Commerce on restricting wheat exports.
• According to sources, DGFT has given permission to four ships stranded at the port to export wheat.
• A quantity of 1,67,211 tonnes was to be loaded on these ships but as soon the ban came into force, the loading was stopped.
• Till then, only 80.368 tonnes of wheat could be loaded on these ships. These ships will carry wheat to Brazil, Bangladesh, Oman and Indonesia.
• In wake of the Russia-Ukraine war, the demand for Indian wheat has increased overseas.
• In the current financial year 2022-2023, the government estimates about 45 lakh metric tonnes of wheat to have been contracted fore xports.
• Of this, 14.63 lakh metric tonnes have been exported till April 2022, higher than 2.43 lakh metric tonnes exported in April 2021.
• Wheat production in India is expected to be lowerthan the earlier estimates. In February this year, the government estimated wheat production to reach 111 million tonnes, which was revised to 105-106 million tonnes.
• Due to a lower production and a higher demand from the private buyers, the government’s procurement of wheat for the PDS is also expected to be much lower this year.
• The government is expected to procure only 195 lakh metric tonnes, which is less than half of the grain quantity-433 lakh metric tonnes procured last year.
Water Politics Between Delhi and Haryana
PAPER 2 INDIAN POLITY
Why You Should Know?
• Recently, As Yamuna water levels continued to dip, Delhi Water Minister Satyendar Jain said the river had dried up as the Haryana government was with holding water.
• However, Haryana CM Manohar Lal Khattar said that Delhi is being given 1,050 cusecs of water as per its share.
Major Points of Dispute
• Wazirabad barrage was the most important reservoir of Delhi.
• It is one of the most important water sources for North and West Delhi.
• Due to a lack of water supply from Haryana, the water treatment plants in Delhi are currently run ning at a fraction of their peak ca pability.
• As a result, Wazirabad WTP’s water production has de creased by 60-70 MGD (million gallons daily).
• The Yamuna has dried up as well due to the with holding of water by the Haryana government.
• A statement issued by the government said that the water level at Wazirabad barrage had dipped to 669 feet while the depth that has to be maintained for efficient water treatment was 674.5 feet.
• Around 70% of Delhi’s water supply comes from the Yamuna and canals emerging from it.
• In addition to the canals, the Delhi Jal Board depends on drawing 120 cusecs from the river itself for treatment, which it can no longer use since the river is mostly dry.
• The board has been under pressure lately, with com plaints of taps running dry com ing in from several parts of North, West and Central Delhi..
• The Yamuna is currently dry due to the Haryana government’s refusal to supply water. Water supply is being impacted in locations such as Civil Lines, Hindurao Hospital, Kamla Nagar, Shakti Nagar, Karol Bagh, Paharganj.
• Meanwhile, the DJB wrote to the Haryana Irrigation Department again requesting it to release an additional 150 cusecs of raw water into the river.
• The Yamuna also spelt Jamuna, is the second-largest tributary river of the Ganges by discharge and the longest tributary in India.
• Originating from the Yamunotri Glacier at a height of 6,387 metres (20,955 ft) on the southwestern slopes of Bandarpunch peaks of the Lower Himalaya in Uttarakhand, it travels a total length of 1,376 kilometres (855 mi) and has a drainage system of 366,223 square kilometres (141,399 sq mi), 40.2% of the entire Ganges Basin.
• It merges with the Ganges at Triveni Sangam, Allahabad, which is a site of the Kumbh Mela, a Hindu festival held every 12 years.
• Like the Ganges, the Yamuna is highly venerated in Hinduism and worshipped as the goddess Yamuna.
• In Hinduism she is the daughter of the sun god, Surya, and the sister of Yama, the god of death, and so is also known as Yami.
• According to popular legends, bathing in its sacred waters frees one from the torments of death.
• It crosses several states: Haryana and Uttar Pradesh, passing by Uttarakhand and later Delhi, and meeting its tributaries on the way, including Tons, Chambal, its longest tributary which has its own large basin, followed by Sindh, the Betwa, and Ken.
• From Uttarakhand, the river flows into the state of Himachal Pradesh. After passing Paonta Sahib, Yamuna flows along the boundary of Haryana and Uttar Pradesh and after exiting Haryana it continues to flow till it merges with the river Ganges at Sangam or Prayag in Allahbad (Uttar Pradesh).
• It helps create the highly fertile alluvial Ganges-Yamuna Doab region between itself and the Ganges in the Indo-Gangetic plain.
PAPER 3 INDIAN ECONOMY
Why You Should Know?
• Recntly, Stagflation refers to an economic situation marked by stagnant economic output and high price inflation.
• The idea became popular during the 1970s when the U.S. economy witnessed high price inflation due to the oil shock as well as an economic recession marked by negative economic growth, Economists at the time could not explain the pre valence of high price inflation and stagnant economic output at the same time.
• The pre vailing motion among economists back then was that an economy can either experience high price inflation or stagnant economic out put, but never both at the same time.
Unemployment and inflation
• The idea of stagflation is closely linked to the Phillips curve which tried to establish that there was a negative empirical relationship between unemployment and inflation.
• That is, according to the Philips curve, when unemployment is high, inflation is low and when unemployment is low, inflation is high.
• The supposed negative relationship between unemployment and inflation was explained by Keynesian economists as a natural phenomenon caused by the prevalence of sticky prices.
• According to these economists, unemployment in an economy rises when wages fail to drop quickly enough to adjust to changing economic conditions.
• Workers are seen as unwilling to accept a cut in their wages, thus forcing businesses to let go of some of their employees in order to adjust to higher wages instead of trying to lower wages. This can affect the overall output of an economy as few er people are now employed.
• Many economists during the time, in fact, came to believe that it was the duty of central banks to carefully manage price inflation in such a way that unemployment is kept within reasonable limits.
• Inflation was supposed to be maintained at a certain level such that there is no excess unemployment and the economy is functioning at its full capacity.
• The belief among economists was that workers could be tricked into accepting lower real wages (but higher nominal wages) when prices rise at a certain rate, thus ensuring that workers are employed and the economy continues to function at full capacity.
Rational expectations model
• The prevalence of both high price inflation and stagnant economic output in the 1970s. however, forced economists to reconsider their economic models.
• There was the need for alternative economic models that could explain the stagflationary environment of the 1970s better than the prevailing Keynesian model.
• The rational expectations model was one of the alternative models proposed to explain stagflation.
• According to this model, workers could not be as easily tricked by central banks as assumed by Keynesian economists.
• The proponents of the rational expectations school argued that when workers observe that prices rise at a certain rate over time, they are likely to demand higher wages in order to beat price inflation and at least maintain their real wages.
• In that case, central banks cannot trick workers so easily and high inflation and high unemployment may prevail at the same time.
• Economists from other schools of thought have also tried to independently explain stagflation. Some, for instance, have argued that even though prices may be sticky and inflation could trick some workers, the economy does not function in a mechanistic way as assumed by the Keynesians.
• For instance, in the Keynesian view price sriseorily after the economy reaches full employment. But there may be no valid reason to believe why prices cannot rise at an aggressive rate while the economy is stagnant.
• This can happen, for instance, when a supply shock is met with ultra-loose central bank policy. The result could be stagnating economic output even as prices of goods rise aggressively due to rising money supply.
• Keynesian economics are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output and inflation.
• In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy.
• Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.
• Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently, a market economy often experiences inefficient macroeconomic outcomes – a recession, when demand is low, and inflation, when demand is high.
• Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank.
• In particular, fiscal policy actions (taken by the government) and monetary policy actions (taken by the central bank), can help stabilize economic output, inflation, and unemployment over the business cycle.
• Keynesian economists generally advocate a regulated market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions.
• Keynesian economics developed during and after the Great Depression from the ideas presented by Keynes in his 1936 book, The General Theory of Employment, Interest and Money.
• Keynes’ approach was a stark contrast to the aggregate supply-focused classical economics that preceded his book.
• Interpreting Keynes’s work is a contentious topic, and several schools of economic thought claim his legacy.
• Keynesian economics, as part of the neoclassical synthesis, served as the standard macroeconomic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973).
• It was developed in part to attempt to explain the Great Depression and to help economists understand future crises.
• It lost some influence following the oil shock and resulting stagflation of the 1970s. Keynesian economics was later redeveloped as New Keynesian economics, becoming part of the contemporary new neoclassical synthesis, that forms current-day mainstream macroeconomics.
• The advent of the financial crisis of 2007–2008 sparked renewed interest in Keynesian policies by governments around the world.
The Phillips Curve
• The Phillips curve is a single-equation economic model, named after William Phillips, hypothesizing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy.
• Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of wage rises.
• Phillips did not himself state there was any relationship between employment and inflation; this notion was a trivial deduction from his statistical findings.
• Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman and Edmund Phelps put the theoretical structure in place.
• In so doing, Friedman was to successfully predict the imminent collapse of Phillips’ a-theoretic correlation. While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.
• In 1967 and 1968, Friedman and Phelps asserted that the Phillips curve was only applicable in the short-run and that, in the long-run, inflationary policies would not decrease unemployment.
• Friedman then correctly predicted that in the 1973–75 recession, both inflation and unemployment would increase.
• The long-run Phillips curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.
• In the 2010s the slope of the Phillips curve appears to have declined and there has been controversy over the usefulness of the Phillips curve in predicting inflation.
• A 2022 study found that the slope of the Phillips curve is small and was small even during the early 1980s.
• Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks.
Stagflation or Recession
• In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
• It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.
• The term, a portmanteau of stagnation and inflation, is generally attributed to Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970.
• Macleod used the word in a 1965 speech to Parliament during a period of simultaneously high inflation and unemployment in the United Kingdom.
• Warning the House of Commons of the gravity of the situation, he said: “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation. And history, in modern terms, is indeed being made.”