Key Idea: Topic 3.3 covers the four macroeconomic objectives — growth, low unemployment, low and stable inflation, and external balance — and the conflicts between them.
✅ Key concepts
- Economic growth
- Actual growth = real GDP rises (AD shifts right). Potential growth = LRAS/PPF shifts right (capacity increases).
- Unemployment types
- Cyclical (demand-deficient), structural (skills mismatch), frictional (between jobs), seasonal.
- Natural rate of unemployment (NRU)
- Frictional + structural unemployment at full employment. Economy can still have NRU and be at potential output.
- Inflation
- Sustained rise in the general price level. Measured by CPI (weighted basket of goods).
- Deflation
- Sustained fall in the general price level — often more dangerous than inflation.
📊 Types of unemployment
- Cyclical — caused by recession (AD falls → firms lay off workers) — solve with demand-side policy
- Structural — skills mismatch (technology, globalisation) — solve with supply-side policy
- Frictional — workers between jobs (short-term, voluntary) — unavoidable
- Seasonal — predictable (tourism, agriculture)
🔥 Causes of inflation
- Demand-pull — AD grows faster than AS → too much money chasing too few goods
- Cost-push — SRAS shifts left (oil price shocks, wage increases, supply chain disruption)
- Monetary — excess money supply growth → inflation (quantity theory of money)
⚡ Conflicts between objectives
- Growth vs inflation — fast growth → demand-pull inflation risk
- Growth vs environment — more output → more pollution, resource depletion
- Low unemployment vs inflation — Phillips curve: reducing unemployment may increase inflation (short run)
- External balance — strong growth → more imports → current account deficit
The Phillips curve shows a short-run trade-off: unemployment↓ → inflation↑. In the long run, the trade-off may disappear (expectations-augmented Phillips curve).