3.3 Macroeconomic objectives

Economic growth is a sustained increase in real output, usually measured as real GDP or real GDP per person.

Short-run growth follows higher AD and moves the economy closer to its existing capacity. Long-run growth follows higher productivity or more factors of production and shifts the PPC/LRAS outward, raising potential output.

If real GDP rises from 500 to 515, the growth rate is (15 ÷ 500) × 100 = 3%. That is real growth only if inflation has been removed; if population rises faster, GDP per person may still fall.

Identify whether the change is AD-driven actual growth or capacity-driven potential growth before choosing an AD/AS or PPC explanation.

A higher nominal GDP is not automatically economic growth: price changes and population changes can reverse the conclusion.

Growth can raise incomes, jobs and fiscal capacity but may increase inequality, resource use and pollution.

Outcomes depend on who gains, what is produced and how growth is financed.

Balance benefits, costs and distribution across time.

A mining boom raises exports and wages but can damage ecosystems and crowd out other sectors.

Growth is not automatically development.

Growth can improve material living standards when real income per person, employment, public revenue and access to goods and services rise. Yet production may deplete resources or create pollution, and gains may accrue mainly to owners of scarce assets, widening income distribution. Evaluate the source and composition of growth, real GDP per capita, who gains and loses, environmental externalities and whether investment makes the path sustainable; the same growth rate can therefore produce very different welfare outcomes.

The unemployment rate is unemployed people as a percentage of the labour force: unemployed ÷ (employed + unemployed) × 100.

Cyclical unemployment follows weak AD; structural unemployment reflects a skills or location mismatch; frictional and seasonal unemployment can remain even near full employment. Costs include lost output and income, fiscal pressure and personal or social harm.

If 8 people are unemployed and 192 are employed, the labour force is 200 and the unemployment rate is 4%. Retraining addresses a structural mismatch more directly than a general demand stimulus.

Classify the cause before choosing a policy; the same unemployment rate can hide very different problems.

People outside the labour force—such as those not seeking work—are not counted as unemployed, and 0% unemployment is neither realistic nor necessarily desirable.

Measurement is imperfect: discouraged workers who stop seeking work leave the labour force; underemployment, informal work and differences in survey definitions can hide labour-market weakness. The natural rate is frictional + structural + seasonal unemployment, excluding cyclical unemployment. Diagram minimum-wage unemployment as labour supplied exceeding labour demanded above equilibrium; structural unemployment as a left shift of labour demand in a market or region; and cyclical unemployment as a recessionary AD/AS gap below potential output.

Inflation is a sustained rise in the average price level; a low, stable rate makes contracts and purchasing decisions easier to plan.

A CPI tracks a weighted basket. Demand-pull inflation begins with spending pressure, while cost-push inflation begins with higher production costs; both can change purchasing power and distribution.

If the CPI rises from 120 to 123, inflation is (3 ÷ 120) × 100 = 2.5%. An energy-price shock can raise costs and inflation while output falls, unlike a pure demand expansion.

State whether the evidence shows a rate, a cause or a distributional effect; then distinguish demand-pull from cost-push before evaluating policy.

Low inflation is not falling prices. A fall in the inflation rate is disinflation; deflation means the general price level itself falls.

CPI may misstate a household's experience because baskets and weights become outdated, consumers substitute between goods, quality and new products are hard to capture, and spending patterns differ. High inflation creates uncertainty, arbitrary redistribution between borrowers and lenders or fixed-income groups, distorted saving, weaker export competitiveness, slower growth and inefficient resource allocation. In AD/AS, demand-pull inflation follows a rightward AD shift; cost-push inflation follows a leftward SRAS shift and can reduce real output.

Deflation is a sustained fall in the general price level. Disinflation is a fall in the inflation rate while prices are still rising.

A fall in AD can reduce output and prices; an increase in SRAS can lower prices while output rises. Persistent deflation can delay purchases, increase real debt burdens, weaken profits and raise cyclical unemployment.

When inflation falls from 6% to 3%, prices are still rising: this is disinflation. If the index falls from 100 to 98, the price level has fallen and the economy has experienced deflation.

Check the price-level series first, then identify whether the shock came through AD or supply before discussing the consequences.

A temporary price fall in one product is not economy-wide deflation, and disinflation is not automatically harmful.

Demand-side deflation is shown by AD shifting left, lowering the price level and real output; supply-side deflation is shown by SRAS shifting right, lowering the price level while raising real output. Persistent harmful deflation can increase uncertainty, redistribute toward creditors, postpone spending, increase cyclical unemployment and bankruptcies, raise the real value of debt, distort allocation and weaken monetary policy when nominal interest rates cannot fall enough. Diagnose the initiating curve before judging the outcome.

Inflation and unemployment may trade off in the short run, but expectations and supply shocks can alter the relationship.

Demand stimulus may lower unemployment and raise inflation; long-run unemployment depends on structural factors.

State time horizon and shock before claiming a trade-off.

A supply shock can raise both inflation and unemployment.

A Phillips curve is not a permanent policy menu.

Compare costs in context. Unemployment causes lost output and tax revenue, higher benefit spending, skills loss and personal or social harm; inflation reduces purchasing power unpredictably, redistributes real income and wealth, damages planning and may weaken competitiveness. Demand expansion can trade lower cyclical unemployment for higher inflation when capacity is tight, but a favourable supply shift can lower both. Priorities depend on severity, duration, affected groups, expectations and available policy—not only the two headline rates.

Macroeconomic policy must weigh objectives because growth, low unemployment, stable prices, equity and sustainability can pull in different directions.

Faster growth can raise jobs and incomes but also demand-pull inflation, pollution or inequality. Low unemployment can raise wage pressure. A subsidy may support jobs while increasing imports or fiscal cost.

A government stimulates construction: employment rises quickly, but if capacity is already tight, prices and imports may rise and the environmental cost may be concentrated locally.

Name the two objectives, trace the policy mechanism and specify whose outcome and which time horizon you are evaluating.

A conflict is not inevitable in every context; spare capacity, policy design and distribution determine whether a trade-off appears.