Macroeconomics: economic growth, inflation and employment
This domain covers macroeconomic performance: how real GDP and GDP per capita are measured, the business cycle, inflation and its causes, employment and unemployment, and the links between these objectives.
Core rules
- GDP is the market value of final goods and services produced in a country in a period. It excludes transfers and second-hand sales. Nominal GDP uses current prices; real GDP uses base-period prices, so it changes only with output. GDP per capita = real GDP ÷ population.
- Growth means an increase in real GDP; intensive growth is per capita. Productivity, capital, labour force quality, technology and institutions drive it.
- Inflation is a sustained rise in the general price level, measured by the CPI. Demand-pull inflation comes from AD growing faster than productive capacity; cost-push from rising input costs; imported inflation from higher import prices.
- Unemployment counts people actively seeking work. Types: frictional, structural, cyclical, seasonal. The unemployment rate = unemployed ÷ labour force × 100.
- The Phillips curve trade-off is short-run; expectations and supply shocks can shift it.
Worked example
Nominal GDP rises 6%, the CPI rises 4%, and population rises 2%. Real GDP growth is approximately (1.06 ÷ 1.04) − 1 ≈ 1.9%. Real GDP per capita growth is approximately (1.06 ÷ 1.04 ÷ 1.02) − 1 ≈ −0.1%. So although nominal GDP looks strong, output per person has slightly fallen: living standards, on this measure, are flat.
Traps
- Reporting nominal GDP growth as real growth.
- Counting discouraged workers as unemployed; they are outside the labour force.
- Treating all inflation as demand-pull.
- Confusing GDP with welfare; it omits leisure, inequality, environmental costs and the informal economy.