Second-round effect
Encyclopedia
A second-round effect means when trade union
s decide to raise wage
s after commodity
prices (e.g. energy, food) have increased sharply. This leads to a high inflation
, so the central bank has to raise interest rate
s.
Robert J. Gordon
describes the second-round effect as the built-in inflation
in his triangle model
. As a result of past inflation, the second-round effect creates inflation ripples in the economy.
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s decide to raise wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s after commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
prices (e.g. energy, food) have increased sharply. This leads to a high inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, so the central bank has to raise interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s.
Robert J. Gordon
Robert J. Gordon
Robert James "Bob" Gordon is an American economist. He is the Stanley G. Harris Professor of the Social Sciences at Northwestern University. He is known for his work on productivity, growth, the causes of unemployment, and airline economics.-Education:...
describes the second-round effect as the built-in inflation
Built-in inflation
Built-in inflation is a type of inflation that results from past events and persists in the present.Built-in inflation is one of three major determinants of the current inflation rate. In Robert J. Gordon's triangle model of inflation, the current inflation rate equals the sum of demand-pull...
in his triangle model
Triangle model
In macroeconomics, the triangle model employed by new Keynesian economics is a model of inflation derived from the Phillips Curve and given its name by Robert J. Gordon. The model views inflation as having three root causes: built-in inflation, demand-pull inflation, and cost-push inflation...
. As a result of past inflation, the second-round effect creates inflation ripples in the economy.