after 1974. From 1972 to 1974 the Control Run values of the rate of money earnings are slightly above the steady 13 per cent per annum growth because unemployment is below 3.76 per cent, as shown in Figure VIII.2. But from 1976 they are continuously falling (that is to say, the rate of money earnings is continually growing at something less than per cent per annum). This is a representation of the phenomenon that : they are very sensitive to actual price movements, then there can be great fluctuations, indeed possibly explosive fluctuations, in a wage-price spiral. Thus if a rise in the level of prices caused a corresponding extra rise in wage rates, which turn raised costs and prices and so raised still further the level of prices, there could be a marked upward spiral of inflation.

doi:10.4324/9780203814628-110

Chapter

after 1974. From 1972 to 1974 the Control Run values of the rate of money earnings are slightly above the steady 13 per cent per annum growth because unemployment is below 3.76 per cent, as shown in Figure VIII.2. But from 1976 they are continuously falling (that is to say, the rate of money earnings is continually growing at something less than per cent per annum). This is a representation of the phenomenon that

Chapter

ABSTRACT

An outstanding feature of these figures is the enormous deterioration in the competitiveness of UK products in the Base Run since 1977, as domestic costs were inflated more rapidly than foreign costs, while the foreign-exchange value of the pound failed to depreciate to offset these domestic events and in fact appreciated. In contrast with this outcome, in the case of both the Control Runs, although domestic cost inflation was much less than with the Base Run, the foreign-exchange rate was consistently depreciated with the result that instead of a huge loss of competitiveness there was a consistent gain of competitiveness after 1975. As was discussed in connection with Figure VIII.3, this increase in

Fig. VII 1.8 Index of Competitiveness (home wage costs expressed in foreign currency as a percentage of foreign wage costs with an initial value

of 100 in 1972Q2).