Economic growth, employment and inflation
Governments measure economic growth with real GDP, unemployment with surveys and claimant counts, and inflation with a consumer prices index. Each has causes and consequences.
📌 Key points
- Gross domestic product (GDP) is the total value of output produced in a country in a year. Economic growth is an increase in real GDP (GDP adjusted for inflation).
- Growth can come from higher aggregate demand, or from more and better resources, investment and new technology; a recession is a period of falling real GDP.
- Growth can raise living standards and employment but may cause pollution, use up resources and increase inequality.
- Unemployment is when people of working age are willing and able to work but cannot find a job; it is measured by the claimant count or a labour force survey.
- Unemployment rate = number unemployedlabour force × 100.
- Frictional unemployment is between jobs; structural unemployment comes from long-term decline of industries; cyclical unemployment comes from too little demand in a recession.
- Unemployment wastes output, lowers tax revenue, raises benefit spending and can cause poverty and social problems.
- Inflation is a sustained rise in the general price level. It is measured by a consumer prices index (CPI), using a weighted basket of goods and services.
- Demand-pull inflation comes from aggregate demand rising faster than supply; cost-push inflation comes from rising costs, such as wages, raw materials and imports.
- Inflation reduces the value of money, hurting savers and people on fixed incomes and making exports less competitive. Deflation is a sustained fall in the general price level; people may delay spending, which can cut output and jobs.
📖 Key terms
- Gross domestic product
- The total value of output produced in a country in a year.
- Economic growth
- An increase in real GDP.
- Recession
- A period of falling real GDP.
- Structural unemployment
- Unemployment caused by long-term changes in the structure of the economy, e.g. a declining industry.
- Inflation
- A sustained rise in the general price level.
- Consumer prices index
- A weighted index that measures changes in the prices of a basket of goods and services bought by households.
- Deflation
- A sustained fall in the general price level.
✏️ Worked example
A country’s consumer prices index rises from 120 to 126 in one year. Calculate the rate of inflation.
- Change in the index = 126 − 120 = 6.
- Inflation rate = change ÷ original index × 100.
- = 6 ÷ 120 × 100 = 5%.
- Answer: the rate of inflation is 5%.
A fall in the rate of inflation (e.g. from 6% to 3%) does not mean prices are falling. Prices are still rising, just more slowly. Only deflation means falling prices.
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