Economic performance

• GDP per capita

  Gross domestic product divided by the number of people in the population; is an indicator of the amount of domestic output per person in the population
• Real GDP

  a measure of the total value of all goods and services produced in an economy in a given period of time with the effect of inflation removed
• Unemployment Rate

  The % of people in the labour force without a job but  registered as being willing and available for work
• Economic growth

  an increase in RGDP in an economy in a year caused by an increase in AD or LRAS
• Short run growth

  the percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.
• long run economic growth

  an increase in the economy's productive capacity due to an increase in the long-run aggregate supply
• output gap

  occurs when there is a difference between the actual level of output and the potential level of output. It is measured as a percentage of national output.
• Factors that would Increase LRAS

  • Higher capital investment
  • Higher labour productivity
  • Increases in the size of the labour force
  • Government spending on infrastructure, education and training
  • Improvements in technology
• 3 main causes of an expansion of LRAS

  • Increases in the quantity of factors of production
  • Increases in productive efficiency (lower average costs in the long-run
  • Increases in the quality of factors of production
•  two ways long-run growth can be shown on a diagram

  • outward shift of LRAS curve
  • outward shift of PPF curve
• causes of a Recession

  • High inflation
  • Black Swan Event e.g COVID-19
  • Higher rates of taxation
  • Financial Crisis
  • Appreciation of exchange rate
  • Falling House Prices
  • High Interest Rates
• benefits of economic growth

  • Higher disposable incomes
  • Increased development and standards of living
  • Lower Unemployment (derived demand)
  • Higher profits for firms leading to more capital investment and innovation
  • Higher fiscal dividend for the government (more income/corporation tax revenue and VAT)
• costs of economic growth

  • Demand-pull inflation
  • Worsening of the current account deficit
  • Environmental costs and negative externalities
  • Higher income inequality
• reasons why income inequality may increase with more economic growth?

  1.) Growth may be limited to one sector/industry meaning incomes only rise in this area

  2.) If growth is limited to urban areas, leaving rural areas with lower incomes

  3.) If there is no welfare state carrying out significant redistribution policies
• price stability


  controlling inflation to achieve a low rate of inflation in line with the government’s target of 2%
• recession


  two or more consecutive quarters of negative real GDP growth
• negative output gap


  when the actual level of GDP is less than the potential underlying level of real GDP
• inflation


  a persistent increase in GPL over a given period of time
• disinflation


  a decrease in the rate of increases of prices - when inflation falls but remains positive
• cost push inflation


  due to a rise in costs of production

  • causes SRAS to shift up
  • reduces profit margins of firms.
  • This then prompts firms to push up the final price of goods and services to maintain profit.
• Causes of cost-push inflation


  • National minimum wage increases.
  • Trade union wage increases.
  • Increase in world commodity prices
  • External supply-side shocks, e.g. bad harvest abroad causing the price of wheat to rise.
  • Rise in indirect taxes (if it is passed on to consumers)
  • Rise in corporation tax (if it is passed on to consumers).
  • Falling productivity
• causes of demand pull inflation


  • exchange rate down - exports cheaper in foreign currency terms so demand and value for exports rises
  • rising animal spirits e.g. positive wealth effect
  • excessive borrowing
  • global economy experiencing faster growth in income and buying a lot of UK goods
• Demand-Pull Inflation


  caused by increases in AD outstripping AS.

  • economy is close to full employment
  • increases in AD lead to GPL rising
  • because supply cannot keep up with the increased demand.
• Consequences of inflation for consumers


  • For individuals, inflation will erode the real value of money. real incomes will fall as purchasing power of incomes falls. So standard of living also falls.
  • Inequality rises - more skilled workers can negotiate nominal wage increases that keep pace or outstrip inflation.
  • Cash loses value more quickly. This means that some consumers take more trips to the bank ('shoe leather' costs).
  • Menu costs are the costs firms face of keeping prices updated in shops.
• Impact of inflation on savers and borrowers


  • Savers lose out because the real interest rate (nominal interest - inflation) falls as inflation rises.
  • Borrowers gain because the real interest rate falls.
  • Indebtedness falls because the real value of debt falls as inflation erodes the real value of repayments.
• Consequences of inflation for firms


  • Business uncertainty – volatile prices means firms may reduce investment because it is riskier.
  • Falling international competitiveness – a high inflation rate vs main trading partners will mean a country's exports will be less internationally competitive.
• Consequences of deflation


  • Unexpected deflation raises the real interest payments for borrowers.
  • Nominal interest rates cannot go below zero. So deflation can force real interest rates below zero.
  • This is because the real interest rate = the nominal interest rate - the level of inflation.
  • This reduces the effectiveness of expansionary monetary policy.
  • Firms have lower profit margins because prices are falling, leading to less investment.
  • Deflation could improve international competitiveness of exports.
• falling exchange rate


  when the value of one currency in terms of another depreciates
• economic growth

  economic growth is defined as the increase in the real value of goods and services produced which is measured by the annual percentage change in real GDP. Long-term economic growth is an increase in productive capacity.