3.3 Macroeconomic objectives

• Short-term growth includes actual growth in the PPC model and AD-driven increases in real output

• Long-term growth includes outward PPC shifts and LRAS-driven increases in full employment output

• Economic growth is measured using growth rates

• Diagram: PPC showing actual growth and growth in production possibilities

• Diagram: AD increase showing higher real output

• Diagram: LRAS increase showing higher full employment output

• Calculation: economic growth rate from data

• Growth can affect living standards, the environment, and income distribution

• Evaluation requires weighing benefits against costs and sustainability concerns

• Unemployment rate measures unemployment relative to the labour force

• Measuring unemployment can be difficult

• Causes include cyclical, structural, seasonal, and frictional unemployment

• Natural unemployment is the sum of structural, seasonal, and frictional unemployment

• Costs include personal, social, and economic costs

• Calculation: unemployment rate from data

• Diagram: minimum wage causing unemployment

• Diagram: fall in demand for labour in a market or region

• Diagram: deflationary gap showing cyclical unemployment

• Inflation is measured using CPI data

• CPI has limitations as an inflation measure

• Inflation can be demand-pull or cost-push

• High inflation creates uncertainty, redistributive effects, saving effects, export competitiveness damage, lower growth, and inefficient allocation

• Calculation: inflation rate from weighted CPI data

• Diagram: demand-pull inflation

• Diagram: cost-push inflation

• Deflation can be caused by changes in AD or SRAS

• Disinflation is a fall in the inflation rate; deflation is a fall in the price level

• Deflation costs include uncertainty, redistributive effects, deferred consumption, cyclical unemployment, bankruptcies, higher real debt, inefficient allocation, and policy ineffectiveness

• Diagram: deflation

• Policymakers compare the relative costs of unemployment and inflation

• Trade-offs may appear between low unemployment and low inflation

• High economic growth may conflict with low inflation

• High growth may conflict with environmental sustainability

• High growth may conflict with equity in income distribution