Key Idea: The supermarket bill went up again, your cousin still cannot find a job, and the news says the economy grew by 2%. Those three headlines are the three things every government is judged on: growth, jobs and stable prices. This topic says what each one means, how it is measured, and why fixing one often makes another worse. Where you meet it:
Paper 1
- Essays.
- Explain [10]: cyclical against structural unemployment, demand-pull against cost-push inflation, two costs of deflation.
- Evaluate / Discuss [15]: does growth always raise living standards; is high inflation a bigger problem than high unemployment.
Paper 2
- Data response.
- Define [2]: inflation, economic growth, the unemployment rate.
- Calculate [1 or 2]: the unemployment rate, or the inflation rate from a price index.
- Explain [4] with an AD/AS diagram: what a rise in fuel prices does to the price level.
Every policy question
- The four objectives.
- Growth, low unemployment, low and stable inflation, a sustainable external balance: every policy later in this unit is judged against them.
📈 Growth: more output, and who gets it
Economic growth is a rise in real GDP: the country produces more than it did last year, after taking price rises out. Actual growth uses capacity that was sitting idle: a move toward the PPC. Potential growth makes the capacity itself bigger: the PPC shifts outward, LRAS shifts right.
What growth brings: Higher incomes, so people can buy more.. More output needs more workers, so **unemployment falls**.. More tax revenue **without raising tax rates**, so more money for schools and hospitals.. Fewer people in poverty, if the gains are shared..
What growth costs: More pollution and faster use of resources, if nothing is done to prevent it.. **Inequality** can widen when the gains go to owners and skilled workers.. If demand grows faster than supply: **demand-pull inflation**.. Longer hours and more stress. GDP counts the output, not the lost free time..
GDP per person going up says the average rose. It does not say who got the rise, what it did to the air, or how many extra hours it took. So the 15-marker does growth always improve living standards has a ready shape: usually yes, and by less than the number suggests. Say what it depends on: how the gains are shared, and whether the growth is sustainable, meaning it does not use up the resources it depends on.
👷 Unemployment: four kinds, one formula
Someone is unemployed if they want a job, are looking for one, and cannot find one. The labour force is everyone in work plus everyone looking. A person who has given up looking is in neither group, which is why the rate can fall while nobody new has found a job.
- number of people unemployed: looking for work and not finding it
- labour force: everyone in work plus everyone looking for work
| Type | Cause | What helps |
|---|---|---|
| Cyclical | a fall in aggregate demand in a recession: firms sell less, so they need fewer workers | demand-side policy: get spending going again |
| Structural | a mismatch between the skills or location workers have and the jobs on offer: a coal town after the mine closes, a cashier after self-checkouts arrive | retraining, education, help to move |
| Frictional | the gap between leaving one job and starting the next | not much: it is normal, and better job matching shortens it |
| Seasonal | work that exists for part of the year only: ski instructors in summer, fruit pickers in winter | a second trade for the other season |
Even at full employment some people are between jobs or waiting to retrain. That leftover, frictional plus structural, is the natural rate of unemployment. It is never zero. Name the type before you name the cure. A spending boost fixes cyclical unemployment and does nothing for the closed mine. The costs: output lost, tax revenue down and benefit spending up at the same time, and skills that fade the longer someone is out of work.
📏 Inflation: measuring a rise in the general price level
Inflation is a sustained rise in the general price level: most prices, month after month, not one good going up once. Each unit of money buys less. It is measured with the consumer price index (CPI): the cost of a basket of what a typical household buys, each item weighted by its share of spending, set to 100 in a base year.
- the consumer price index this year
- the consumer price index the year before
| Term | The general price level is… | Numbers that show it |
|---|---|---|
| Inflation | rising | index 100 → 104 → 108: prices up about 4% a year |
| Disinflation | still rising, but more slowly | inflation of 6% one year and 3% the next: prices still rose |
| Deflation | falling | index 100 → 98: inflation of −2% |
Important: It is an average basket. A student who spends half their money on rent feels a different inflation rate from the average household. It struggles with quality: a phone at last year's price that does twice as much shows up as no change. New products, and buyers switching to cheaper brands, reach the basket late. Those are the limitations of the CPI. Each one is worth a sentence, with the example.
🔥 Two causes, two very different diagrams
Prices can be pulled up by too much spending or pushed up by higher costs. The AD/AS diagram tells the two apart in one glance: look at output.
Demand-pull: **AD shifts right** faster than the economy can produce.. Price level **up**, real output **up**: a boom, cheap credit, a government spending freely.. The cure is to cool spending: contractionary demand-side policy..
Cost-push: **SRAS shifts left** because producing anything now costs more.. Price level **up**, real output **down**: an oil price jump, a big wage rise, a weaker currency making imports cost more.. Cooling spending makes the fall in output worse. The cure is on the supply side..
| Problem | Who loses | Why |
|---|---|---|
| High inflation | savers and people on fixed incomes | the same money buys less every year |
| High inflation | lenders; exporters; firms deciding whether to invest | money repaid is worth less than money lent, so borrowers gain; home prices rise faster than abroad, so exports lose sales; nobody can plan |
| Deflation | shops and the people they employ | buyers wait for lower prices, spending falls, prices fall again: a spiral, and firms cut wages and jobs |
| Deflation | anyone with a debt | the debt is the same number but incomes and prices are lower, so it gets heavier in real terms |
Central banks aim for low and stable inflation, around 2%. Not zero, because with a 0% target one bad year tips the economy into deflation, and a little inflation lets real wages adjust without anyone taking a pay cut. Stable matters as much as low: households and firms can plan when they know roughly what next year's prices will be.
⚡ Conflicts: fix one objective and another slips
A government wants growth, low unemployment, low and stable inflation and a sustainable external balance, all at once. The tool that delivers one often pushes another the wrong way, especially in the short run.
| Push on this… | …and this slips | The way out |
|---|---|---|
| Raise AD for growth and jobs | demand-pull inflation, and more imports as incomes rise | supply-side policy: more capacity, so output rises without prices |
| Squeeze AD to cut inflation | output falls and cyclical unemployment rises | the trade-off is weakest when there is spare capacity: AD can rise with little inflation |
| Grow fast | more emissions and faster use of resources | green growth: renewable energy, carbon pricing |
| Redistribute for equity | weaker incentives to work and invest (efficiency) | taxes and transfers designed to keep the incentive to work |
In the short run, lower unemployment tends to come with higher inflation: the curve slopes down, and a boost to AD moves you along it. In the long run the curve is vertical at the natural rate. Once people expect the higher inflation and ask for higher wages, unemployment drifts back to where it started and only the higher inflation stays. So a spending boost buys a temporary fall in unemployment, not a permanent one. Only supply-side policy moves the natural rate itself.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each before opening the plan.
In a country, 24 million people are employed and 2 million are unemployed. A further 8 million adults are not looking for work. Calculate the unemployment rate.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the price index.
The cost of a country's consumer basket was $500 in the base year, $530 in 2024 and $545 in 2025. Calculate the consumer price index for 2025 and the inflation rate in 2025.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the diagram question.
A country's currency falls sharply in value, so the parts and fuel its firms import now cost more. Using an AD/AS diagram, explain the likely effect on the price level and on real output.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the Paper 1 shape.
Using real-world examples, discuss the view that high inflation is a bigger problem for an economy than high unemployment.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
A factory that was half idle now runs two shifts. Actual or potential growth? Actual. It uses capacity that already existed: a move toward the PPC. Potential growth would be building a second factory: the PPC shifts outward.
Write the unemployment rate formula, and say who is not in the labour force. Unemployed ÷ labour force × 100. The labour force is everyone in work plus everyone looking for work. Students, retired people and anyone who has stopped looking are outside it.
A steelworks closes for good and its workers have no other skills. Which type of unemployment? Structural. The jobs have gone and the workers' skills no longer match what is on offer. A spending boost does not help; retraining does.
Inflation falls from 8% to 3%. Are prices falling? No. Prices are still rising, by 3% instead of 8%. That is disinflation. Deflation is when the index itself falls and the inflation rate is negative.
The price level rises and real output falls. Demand-pull or cost-push? Cost-push. SRAS shifted left. With demand-pull, AD shifts right and output rises with prices.
Inflation turns out higher than anyone expected. Who gains, borrowers or savers? Borrowers. They repay the same number of dollars, and each one is worth less. Savers and lenders lose.
Why do central banks aim for about 2% and not 0%? With a 0% target, one bad year tips the economy into deflation, where buyers wait and debts get heavier. A little inflation also lets real wages adjust without pay cuts.
The government keeps boosting AD to hold unemployment below the natural rate. What happens in the long run? People expect the higher inflation and ask for higher wages, so unemployment drifts back to the natural rate and only the inflation stays. The long-run Phillips curve is vertical.
Exam tips
- Divide by the labour force, never the population. Write the labour force line before you divide.
- Inflation is a sustained rise in the general price level. One good going up once is not inflation.
- Inflation rate = percentage change in the CPI, divided by the earlier year. Deflation is a falling index; disinflation is a rising index that rises more slowly.
- On the AD/AS diagram, output tells you the cause: up with demand-pull, down with cost-push.
- Name the type of unemployment before you name the cure. A demand boost does nothing for the closed mine.
- Every time you write Phillips curve, write short-run or long-run next to it. The conclusion flips between them.
- In a 15-marker on growth or on conflicts, say what it depends on: spare capacity, how the gains are shared, whether it can last. Then give a verdict that answers the question's own word: always, bigger, only.