**1. Introduction**

The economic growth, unemployment, inflation and current account balance are the most important variables that show the performance of an economy. The quality of the relationship between these variables is extremely important when the applying economic policies. Thus there may be harmony or contradiction between the policies to be implemented on the issues. In other words, unemployment policies for economic growth also lead to a decrease in unemployment, while trying to lower inflation could put negative pressure on unemployment. Therefore the

alignment or contradictions between the intended objectives and the instruments to be implemented should be taken into account when making policy proposals. In this study, the relations between growth, unemployment, inflation and current account are first discussed in theoretical terms and it is examined whether these theories are valid or not in the case of Turkey.

**2. Unemployment and inflation relationship: Phillips curve**

*DOI: http://dx.doi.org/10.5772/intechopen.93833*

between unemployment, wage rates, prices and productivity [8].

ment was held at 4%, there could be a 2% increase in inflation [10].

prices and unemployment [9].

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Paul Samuelson and Robert Solow examined the relationship between inflation and unemployment by substituting the Consumer Price Index in the United States instead of the wage rate, and thus developed a new interpretation in 1960. In this study, it was concluded that if unemployment was held at 5–6% (if unemployment were held at 5 to 6 percent) the price index could be stable, whereas if unemploy-

This interpretation, also called the Phillips Curve, which has been modified and improved has gained great importance in the literature and has become meaningful in terms of economic policy in this way. The Philips Curve shows the inverse relationship between the unemployment rate with the inflation rate, compatible with the Keynesian approach, high inflation rate, low unemployment rate and low inflation with high unemployment rate means that a choice can be made between combinations of. The governments which can be called' Mitte-Rechts 'prefer the first combination, while the governments that are' left-of-Centre '('Mitte-Links') have adopted the second policy proposal. The stagflation process, called the combination of rising inflation and unemployment, was seen after the 1970 oil crisis. This situation has led to questioning and discussion of the stable relationship between

The fact that the stagflation phenomenon that emerged in the late 1960s could not be explained by Phillips Curve Analysis intensified the debate on the Phillips curve durin this period. Under the fine-tuning policy, for example, if the government wants to reduce unemployment, it must increase total demand. However, it is

necessary to endure some inflation increase with increasing total demand.

intervention [7].

The relationships between macroeconomic variables in an economy and the reciprocal interactions of these variables are crucial to policy proposals. The intervention was deemed unnecessary because it was assumed that the economy would always reach the full employment balance thanks to its spontaneous, intrinsic mechanisms at the time of the classic-neoclassical paradigm. However, the Great Depression system in 1929 has shown that it is insufficient to solve many problems such as especially unemployment and furthermore problems become deeper than before. Keynes' masterpiece General Theory has been a turning point in terms of the government's intervention in the economy and the nature of this

*Relationship between Economic Growth, Unemployment, Inflation and Current Account…*

It can be said that the Classic-Neoclassical paradigm is also in crisis with the publication of the General Theory which Keynes expressed his views about the crisis. Microeconomic analyses which examine the optimum distribution of resources in neoclassical theory were replaced by the analysis of macroeconomic variables such as employment, national product, total lack of demand in the post-Keynes period, and analysis of interactions between these variables. In this context, the study was published with the title "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957" [8]. This study led to a long discussion of the relationship between inflation and unemployment and the effectiveness of its policies to be implemented. Reflecting the views of neoclassical Synthesis Keynesian economists, the original version of the Phillips Curve shows the relationship between the rate of increase of nominal wages in the UK between 1861 and 1957, i.e. wage inflation and the unemployment rate [9]. Phillips said the hypothesis that the change in monetary wage rates (the rate of change of money wage rates) is determined by the level of unemployment and the rate of change of unemployment can be generally accepted. These conclusions are of course tentative. There is need for much more detailed research into the relations

Accordingly, the Phillip curve analysis, which explains the nature of the relationship between unemployment and inflation, was analyzed in detail by comparing interpretations of different economic approaches. In the case of inflation, the demand-side policies will have an effect on these variables. In contrast, according to the Monetarist and New Classical approach, demand-side policies are ineffective and therefore unnecessary. In more accurate terms, the relationship between unemployment and inflation is temporary in the short-term because both variables may change in the same direction in the long term. After this topic was discussed in the first part of the study after then the case of Turkey was examined and discussed.

Another theoretical approach that attempts to explain the relationship between macroeconomic variables analysis are known as Okun's law. The Okun's law suggests an inverse relationship between the growth rate and the unemployment rate. In the one study is determined by Okun with regression analysis between 1947 and 1960. This law that explained every %1 growth rate in the United States reduced the decreased the unemployment rate 0.5% points. However, the growth rate must exceed a certain level and average or trend growth rate in order to affect unemployment. Although the Okun's law is tested for different countries which are generally verified the nature of this relationship varies considerably from country to country.

The Okun's law was explained in details in the second section and its validity was tested for Turkey in the last section with symmetric and asymmetric causality. The another important indicator of a country's economic performance in macroeconomics is the current account balance. There is a very close relationship between the current account deficit and the growth rate which has become an important problem especially for developing countries.

In the many literature of econometric studies based on the relationships between economic growth, current account deficit, inflation and unemployment have also been conducted. In their study, [1] conducted the necessary econometric analyzes to determine the relationship between the variables using the monthly data 2007– 2014 economic growth, unemployment and inflation. In the study under discussion, there is a causality analysis between the current account deficit, inflation problem and growth [2]. The study [3] Brazil, Russia, India, using annual data for the period 1993–2011 belong to China and Turkey, the panel analyzed the causal relationship between the current account deficit and inflation method. The relations between Azerbaijan, Kazakhstan, Kyrgyzstan, Macedonia and Turkey for the period 1996– 2012 using data on inflation and unemployment with panel cointegration analyze and causality tests [4]. They are studied causality and vector error correction model between inflation, economic, growth and unemployment in North African Countries [5]. In the study the inflation and economic growth are taken for Nigeria with regression analysis. They studied the inflation, economic growth, unemployment relationship with Var analysis for Iraq. In this study, the relationship between the current account deficits, economic growth and the current account with certain explanations are wanted to examined [6].

The last part of our chapter we determined the relationship between the current account and the growth rate and they were explained with the national income inequality and the nature of this relationship was discussed in Turkey.

When we look at these relations in terms of causality, it is stated that the direction of the relationship in question will yield different results when viewed as asymmetric and symmetrical and should be adapted accordingly to their economic policies.

*Relationship between Economic Growth, Unemployment, Inflation and Current Account… DOI: http://dx.doi.org/10.5772/intechopen.93833*
