Economic growth and unemployment

Last time

Before we start: last time, in Reasons for intervention, indirect taxes and subsidies, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Output and jobs

Economic growth raises living standards; unemployment wastes resources and harms people. The two are closely linked: when output grows, jobs usually grow. This lesson covers both, with their causes, consequences and policies.

Actual and potential growth

Actual growth is an increase in real GDP, as unused resources are brought into use: a movement towards the PPC, or along LRAS. Potential growth is an increase in productive capacity: the PPC shifts out, and LRAS shifts right. Growth is measured by the percentage change in real GDP, adjusted for inflation.

Causes of growth

Short-run growth comes from rising AD: consumer spending, investment, government spending and net exports. Long-run growth comes from rising LRAS: more and better labour and capital, technology and productivity. Sustained growth needs both: enough demand, and enough capacity.

Benefits and costs of growth

Benefits: higher living standards, more jobs, more tax revenue for public services, and less poverty. Costs: environmental damage, resource depletion, inflation if AD outruns capacity, wider inequality, and current account deficits. Whether benefits outweigh costs depends on the type of growth, its sustainability, and how gains are shared.

Unemployment

Unemployment means people who are willing and able to work, and actively seeking work, but without a job. It is measured by the labour force survey, using the international definition, or a claimant count of those receiving benefits. The rate is unemployed divided by the labour force, times 100: 1.2 million out of 30 million is 4 per cent.

Types of unemployment

The main types of unemployment and their causes.

Consequences of unemployment

For individuals: lost income, lower living standards, loss of skills, and poorer health. For the economy: lost output, the economy inside its PPC; lower tax revenue and higher benefit spending. For society: poverty, inequality, and possibly crime.

Reducing unemployment

Cyclical unemployment: raise AD with expansionary fiscal or monetary policy. Structural and frictional: supply-side policies: training, better job information, and help to move. Increasing LRAS creates capacity, but jobs follow only if demand grows too. So the best policy depends on the type.

Is growth always good?

Consider who gains: if growth benefits only the rich, inequality may rise. Consider the environment and future generations: sustainable growth. And the time period: costs such as pollution may appear in the long run.

Mistakes that lose marks

Mistake one: confusing actual growth with potential growth. Mistake two: suggesting raising AD for structural unemployment. Mistake three: dividing unemployed by the population, not the labour force. The fix: the right growth, the right type, the right formula.

The full-marks tip

The full-marks tip: separate actual from potential growth, using the PPC and LRAS. Match the policy to the type of unemployment.

On one card

So, on one card: growth and unemployment. Keep it for revision.