2.2.1a The main economic objectives

Economic growth is a core macroeconomic objective

1. Economic growth means an increase in the real output of goods and services a country produces over time, and governments treat steady growth as one of their main macroeconomic objectives, aiming for national output to keep rising year after year rather than standing still.

Growth raises incomes, employment and living standards

1. When firms produce more, they usually need more workers, so employment tends to rise, and higher output means people earn higher incomes and can afford more goods and services.
2. Rising output over many years is linked to better living standards for the population as a whole.

Governments aim for growth that is steady and sustainable

1. Steady growth: output rises at a fairly even pace instead of in sudden booms and slumps.
2. Sustainable growth: growth that can be kept going in the future without using up resources or badly harming the environment.
3. Governments prefer steady, sustainable growth because it is easier for households and firms to plan around, and because very fast, unsteady growth is harder to maintain and can create problems later.
4. When output and incomes rise, the government usually collects more tax revenue, which can help fund public services such as the NHS, schools and roads.

Price stability and full employment are also core objectives

1. Price stability does not mean prices never change. It means prices rise gently and steadily, so people are not surprised by sudden jumps.
2. Full employment and low unemployment describe the same healthy labour market. The objective is about putting willing workers into productive jobs, not necessarily reaching zero unemployment.

Stable prices support confidence, saving and planning

1. When inflation is low and stable, households and firms can plan ahead with confidence about future prices and costs, and firms feel more able to invest and hire.
2. Stable prices also protect the value of savings, because money keeps most of its purchasing power over time.

The UK targets two per cent inflation

1. In the UK the Bank of England is set a target of keeping CPI inflation at around 2 per cent a year, giving households, firms and the government a clear, predictable benchmark to plan around.
2. UK CPI inflation stood at 2.9 per cent in July 2026, above the 2 per cent target, showing that hitting the target is not automatic.

Unemployment means output the economy never gets back

1. When people who want to work cannot find a job, their labour is wasted and the goods and services they could have made are lost for good, so the whole economy is poorer.
2. Using the labour force fully helps the economy produce as much as it can, and long spells without work can also harm people's health, confidence and skills.

High employment raises incomes and eases pressure on government

1. People in work earn incomes, which supports their living standards and spending, and when more people work the government pays out less in unemployment benefits while collecting more tax.
2. In April to June 2026 the UK unemployment rate stood at 4.9 per cent, with an employment rate of 75.1 per cent, illustrating that even a healthy labour market keeps some frictional unemployment as people move between jobs.

A stable balance of payments is a core objective

1. Governments aim for a stable balance of payments on the current account, avoiding a deficit that is so large or long-lasting that the country cannot keep financing it. The balance of payments records money flowing into and out of the country from trade and other transactions with the rest of the world, and is covered in full in 2.2.5.

The UK runs a goods deficit and services surplus

1. In the first quarter of 2026 the UK ran a current account deficit of £15.1 billion, equal to 1.9 per cent of GDP, made up of a trade in goods deficit of £59.5 billion but a trade in services surplus of £51.8 billion.
2. This goods deficit, services surplus pattern is the standard shape of UK trade: the country imports more goods than it exports, while exporting more services, such as financial and business services, than it imports.

A persistent deficit forces a country to borrow abroad

1. To finance a current account deficit, a country must borrow from or sell assets to the rest of the world, which is why the UK's net international investment position stood at a liability of £122.1 billion at the end of March 2026.
2. For this reason a stable balance of payments matters alongside growth, price stability and full employment as one of the government's principal objectives.

2.2.1b Conflicts between government objectives

A conflict is when achieving one objective harms another

1. Because the principal objectives, growth, price stability, full employment and a stable balance of payments, do not always move together, governments cannot pursue every aim as strongly as they would like at the same time.

Faster growth can push demand ahead of supply

1. When an economy grows quickly, households and firms spend more, and if that demand rises faster than firms can supply, prices tend to be pushed up, so a push for faster growth can conflict with the aim of low, stable inflation.

A tight labour market can add to inflation

1. As more people find work, they earn and spend more, adding to demand across the economy, and firms may also have to offer higher wages to attract scarce workers, adding to their costs.
2. Both effects can push prices up, so pursuing very low unemployment can conflict with the aim of low inflation.

Whether growth and jobs conflict with price stability

1. It depends on how much spare capacity the economy has, because if firms have unused capacity, such as idle machinery or workers who could do more hours, they can meet extra demand by producing more rather than raising prices, so growth need not fuel inflation.
2. It depends on how tight the labour market already is, because if unemployment is already low, as in 2026 at 4.9 per cent, pushing it lower forces firms to compete harder for scarce workers, raising wages and costs, whereas an economy with more slack can create jobs without much wage pressure.
3. It depends on how the Bank of England responds, because holding or raising Bank Rate can cool demand and contain the inflationary side effect of growth, though usually at some cost to growth and jobs in the short run.

Faster growth can cost the environment and trade

1. Faster growth often means making and using more, which can create more pollution and use up more resources, harming the environment.
2. As incomes rise with growth, people also tend to buy more imports, which can worsen the current account.

How growth conflicts with the environment and trade

1. It depends on how the extra output is produced, because growth built on renewable energy and efficient technology creates far less pollution than growth built on burning more fossil fuels, so the environmental cost of a given amount of growth can vary widely.
2. It depends on what households spend their extra income on, because if rising incomes are spent mainly on UK-made goods and services the current account is barely affected, but if they are spent on imported goods, as the UK's large goods deficit suggests is common, the current account deficit widens.
3. It depends on the time frame considered, because a short burst of import-heavy growth may only briefly widen the deficit, whereas years of growth built on rising imports can leave a persistent, harder to finance deficit.

Governments must prioritise and accept some trade-offs

1. Because objectives conflict, a government cannot pursue every aim as strongly as it would like at once, so it must decide which objectives matter most given the state of the economy at the time.
2. Different governments can reasonably weigh the same trade-off differently, for example prioritising jobs over inflation in a downturn but the reverse when prices are rising quickly.

2.2.1c Other objectives and ethical considerations

Governments pursue other objectives beyond growth, jobs and prices

1. Alongside the four principal objectives, growth, price stability, full employment and a stable balance of payments, governments hold other objectives too.
2. These include reducing inequality and managing environmental change, reflecting a wish for an economy that is fair and sustainable, not just large.

Reducing inequality is another government objective

1. An unequal distribution of income or wealth across the population, covered fully in 2.2.6, means fewer people live in poverty when that gap between richest and poorest households is smaller.
2. Government policy can narrow this gap through progressive taxation and through benefits and public services targeted at lower-income households, covered in more depth elsewhere.

Managing environmental change is another objective

1. Using resources today should not leave future generations worse off, so development is only sustainable if it can continue over the long term.

Growth can deplete resources and damage the environment

1. Depleting resources: using non-renewable resources such as oil, coal and metals means less is left for future generations.
2. Pollution: more production and transport can raise air and water pollution, which harms health and the natural world.
3. Environmental damage: overfishing and burning fossil fuels can cause lasting harm such as deforestation and climate change.

Countries can take steps to make growth more sustainable

1. Countries can make growth more sustainable by switching to renewable energy such as wind and solar, conserving resources through recycling, and controlling pollution with rules and taxes.
2. These steps can cost more or slow growth in the short term, so governments must weigh the benefits to the future against the costs today.

Moral and ethical considerations underpin these objectives

1. These include a duty to look after the poorest people in society and a duty to protect the planet for future generations.
2. For many governments, reducing inequality and protecting the environment are valued as objectives in their own right, not only because they support growth.

Pursuing one objective can harm a specific group

1. A policy aimed at one objective can help the country overall while still making a particular group of people worse off.
2. Raising interest rates to fight inflation: raises monthly repayments for people with a variable-rate or newly fixed mortgage, even though it helps savers and slows inflation for everyone.
3. Taxing carbon-heavy industries to protect the environment: can raise costs and put jobs at risk in specific industries, such as steel or oil and gas, even though it benefits the wider population through a cleaner environment.
4. Raising the minimum wage to reduce in-work poverty: raises pay for low-paid workers who keep their jobs, but can make some low-skilled jobs too expensive for firms to keep, risking job losses for a smaller group.

Weighing costs to one group against wider gains

1. This weighing up applies to each example above, from mortgage holders facing higher repayments to workers in carbon-heavy industries and low-skilled workers priced out of jobs, since each is a specific group bearing a cost while the wider population gains.

2.2.2a The significance of economic growth

Economic growth means an increase in real output

1. Growth is measured for the whole economy, not for a single firm or household.
2. Real output means the actual quantity of goods and services produced, once the effect of rising prices has been stripped out.
3. A rise only counts as growth if more is genuinely produced, not just if prices have gone up; the full real GDP calculation is covered in 2.2.2c.
4. When more is produced each year, the economy is said to be growing.

Growth can speed up, slow down or turn negative

1. Positive growth means real output is higher than it was in the previous period.
2. Growth can be faster in some years and slower in others, even while output is still rising.
3. Negative growth means real output has fallen, so the economy has become smaller.
4. Over the long run most economies grow, but the rate of growth changes from year to year.

Higher output raises incomes and living standards

1. Producing more goods and services usually means firms need more workers, so employment tends to rise.
2. As firms sell more, they pay out more in wages and profits, so household incomes tend to rise.
3. Higher incomes let people buy more goods and services, raising material living standards.
4. Growth also gives the government more tax revenue, which can fund public services such as schools and hospitals.

Economic growth is a central goal for governments

1. Because growth raises incomes and employment, most governments treat it as an important economic aim.
2. Steady growth helps a country reduce poverty by giving more people access to paid work.
3. Growth can improve living standards over the long term, as output per person tends to rise.
4. For these reasons, policymakers watch quarterly GDP releases from the ONS closely, and growth is one of the government's main macroeconomic objectives.

2.2.2b Causes, costs, benefits and policies for growth

Growth comes from more or better factors of production

1. An economy grows when it can produce more, which needs more or better factors of production.
2. A larger or more skilled workforce (labour) allows more goods and services to be made.
3. More capital, such as machines and factories, lets each worker produce more.
4. Discovering or using more natural resources (land) can also raise output.

Investment builds up the economy's capital

1. Investment is spending by firms on capital goods such as equipment, tools and buildings.
2. More capital means workers have better tools, so output per worker can rise.
3. Investment in infrastructure, such as roads and broadband, helps the whole economy produce and trade more.
4. Because it expands productive capacity, investment is one of the main drivers of long-term growth.

Better skills and technology raise productivity

1. Productivity is output per worker or per hour, and rising productivity is a key cause of growth.
2. Education and training improve workers' skills, so they produce more and better output.
3. Technological change, such as new machines or software, lets firms produce more from the same inputs.
4. Improvements in health also raise productivity, because healthier workers miss less work and work more effectively.

Government policy can support the causes of growth

1. Governments can encourage growth by funding education and training to improve skills.
2. Spending on infrastructure gives firms the roads, ports and networks they need to expand.
3. Policies that encourage firms to invest, such as grants or stable conditions, help build capital.
4. These are examples of supply-side policy, which is covered in full in 2.3.3; here it matters because it raises the economy's capacity to produce.

Growth raises incomes, jobs and living standards

1. Economic growth usually raises average incomes, letting people buy more goods and services.
2. As firms expand, they hire more workers, so employment tends to rise and unemployment to fall.
3. Higher output gives the government more tax revenue to spend on public services.
4. Over time, growth tends to raise material living standards and reduce poverty.

Fast growth can cause inflation and use up resources

1. If demand grows faster than the economy can produce, prices may rise, causing inflation.
2. Rapid growth can use up non-renewable resources, such as oil and minerals, more quickly.
3. This raises the question of whether current growth is sustainable for future generations.

Growth can widen inequality and damage the environment

1. The gains from growth may go mainly to owners of firms and skilled workers, widening inequality.
2. Increased production often causes more pollution and greenhouse gas emissions.
3. Growth can lead to loss of green space, congestion and other environmental costs.
4. These social and environmental effects are not shown in the GDP figures themselves.

How far growth's benefits outweigh its costs

1. It depends on how fast the economy grows, because slow, steady growth is less likely to trigger inflation than a rapid boom that outstrips the economy's capacity to produce.
2. It depends on how the gains are shared, because growth concentrated among firm owners and skilled workers widens inequality, while broad-based wage growth raises living standards for most people.
3. It depends on whether the growth is environmentally sustainable, because growth built on depleting non-renewable resources or high emissions creates costs that future generations must bear.
4. It depends on the state of the economy beforehand, because growth that reduces high unemployment brings large benefits, whereas growth in an economy already close to full employment mainly pushes up prices.
5. Overall, therefore, steady, broad-based and environmentally sustainable growth benefits an economy far more than growth that is rapid, unevenly shared or environmentally costly.

2.2.2c GDP measures and calculations

GDP measures the value of what a country produces

1. Because output is hard to add up in units, GDP adds it up in money terms, using the prices of the goods and services.
2. A rising GDP suggests the economy is producing more, so GDP is the main measure used to track economic growth.
3. GDP counts production inside the country's borders, whoever owns the firms.

Real GDP strips out the effect of rising prices

1. If prices rise, nominal GDP can go up even when the actual quantity produced has not changed.
2. Because it ignores price rises, real GDP is the figure used to judge genuine economic growth.

Converting nominal GDP to real GDP removes price rises

1. To convert nominal GDP into real GDP, divide nominal GDP by the price index for that year, expressed as a fraction of 100.
2. The formula is:

$$Real\; GDP=Nominal\; GDP÷\left(\frac{Price\; index}{100}\right)$$

GDP per capita shows output for each person

1. GDP per capita is useful for comparing countries of different population sizes.
2. A large country can have a high total GDP but a low GDP per capita if its population is very large.

GDP per capita is GDP divided by population

$$GDP\; per\; capita=GDP÷population$$

1. Keep the units consistent on the top and bottom of the division, for example pounds and people.

The growth rate is real GDP's percentage change

1. Economic growth is worked out as the percentage change in real GDP from one year to the next.
2. Using real GDP means the result shows a true change in output, not just a change in prices.

$$Growth\; rate=\frac{change\; in\; real\; GDP}{original\; real\; GDP}\times 100$$

A falling real GDP gives a negative growth rate

1. If real GDP falls, the percentage change is negative, showing the economy has shrunk.
2. For example, continuing the invented figures above, if real GDP fell from £2,040bn to £2,020bn, the change is about:

$$\frac{2,020-2,040}{2,040}\times 100\approx -1per\; cent$$

Always finish by saying what the number means

1. A calculated figure is only useful once it is interpreted.
2. A growth rate of 1.2 per cent means real output, and roughly average incomes, rose by that much over the year.
3. A rise in GDP per capita suggests the average person has more goods and services available than before.
4. Ending with an interpretation sentence turns a calculation into an economic conclusion.

2.2.3a Measuring employment and unemployment

Employment means doing paid work

1. In the UK the working-age population is usually taken as those aged 16 to 64.
2. A person counts as employed even after only a small amount of paid work in the week, such as a few hours.

Unemployment means wanting work but having none

1. A person must meet all three parts of this test at the same time:
   1. they have no paid work,
   2. they are ready to start work soon,
   3. they have looked for work recently.
2. Someone who fails any part of the test is not classed as unemployed.

The labour force is the employed plus the unemployed

1. The economically inactive include students, retired people, those caring for family and the long-term sick.
2. Discouraged workers, who have given up looking, are counted as inactive rather than unemployed.

Employment patterns have changed over time

1. Full employment does not mean everyone has a job; it means nearly everyone who wants a job at going wages can find one.
2. The share of part-time and flexible jobs has grown over recent decades.
3. More women have joined the labour force, raising the participation rate.
4. Employment has shifted from manufacturing towards service industries.

Unemployment is measured in two main ways

1. The UK measures unemployment using the Claimant Count and the Labour Force Survey.
2. Each method counts a slightly different group of people, so the two figures rarely match exactly.

The Claimant Count records people claiming benefits

1. It is cheap and quick because the figures come from records the government already keeps.
2. It can undercount because some jobless people do not qualify for benefits or choose not to claim.
3. In July 2026 the UK Claimant Count stood at 1.665 million (Source: ONS).

The Labour Force Survey uses the international ILO measure

1. It counts someone as unemployed if they are without a job, available to start within two weeks, and have actively looked for work in the last four weeks.
2. Because it uses an international standard, the survey lets us compare unemployment between countries.
3. It is more expensive and slower than the Claimant Count, and as a survey it carries a margin of sampling error.

The two measures give different figures

1. The ILO measure from the Labour Force Survey is the headline figure used in official reports and international comparisons.
2. For April to June 2026, the UK's headline (LFS/ILO) unemployment rate was 4.9 per cent, a different measure from the Claimant Count of 1.665 million for July 2026, so the two should not be compared directly (Source: ONS).

The un/employment rate and economic activity

Working out the unemployment rate from raw numbers

1. The formula is:

$$Unemployment\; rate=\frac{number\; unemployed}{economically\; active\; population}\times 100$$

A rate needs its base and period stated

1. Always state which population a rate is a percentage of: the economically active population for the unemployment rate, or the working-age population for the employment and inactivity rates.
2. Always name the time period, such as April to June 2026, since labour market figures are updated with each ONS release.

2.2.3b Types and causes of unemployment

The same word covers several different kinds of unemployment

1. Economists sort unemployment into types so that each can be understood and tackled.
2. Each type has a different cause and typical length, so telling them apart is an important skill.

The four main types each have a clear meaning

1. Frictional and seasonal unemployment are usually short-lived and exist even in a healthy economy.
2. Structural unemployment can last a long time because workers need to retrain or move.
3. Cyclical unemployment appears in a downturn and fades in a recovery.

Frictional unemployment happens between jobs

1. Frictional unemployment is caused by imperfect information: workers and employers take time to find each other, and finding a suitable vacancy takes time even when jobs exist.

Seasonal unemployment follows the time of year

1. Seasonal unemployment is caused by regular changes in demand across the year, for example in tourism, farming and construction.

Structural unemployment follows long-term change

1. New technology and automation can replace workers with machines.
2. Globalisation can move production to countries with lower costs.
3. The decline of industries leaves workers with skills that are no longer needed.
4. A geographical mismatch means jobs exist, but not where the unemployed live.

Cyclical unemployment follows the ups and downs of demand

1. Cyclical unemployment is caused by a fall in total spending in the economy during a downturn.
2. When sales fall, firms produce less and cut jobs; as incomes fall, spending falls further, so still more jobs can be lost.

The types differ in how long they typically last

1. Voluntary unemployment, where specified, is when a person chooses not to take a job at the going wage, rather than being unable to find one.
2. Matching a cause to a type is the key skill: ask what the person's situation is, and the type usually becomes clear.

Naming the type is the key exam skill

1. In the exam you often need to match an example to its type and justify your choice by linking it to the cause.
2. Support your choice of type with the specific detail in the scenario, such as the season, the industry, or whether demand across the whole economy has changed.

2.2.3c Consequences and policies for unemployment

Unemployment harms the people without work

1. The unemployed lose their income, so their living standards fall.
2. Longer spells can lead to poverty and debt.
3. Skills can fade the longer someone is out of work, making it harder to get a job.
4. Unemployment can damage physical and mental health and confidence.

Firms and local communities feel the effects too

1. With fewer people earning, firms sell less, so their revenue falls.
2. Some firms may then cut jobs of their own, spreading the problem.
3. High local unemployment can lead to falling spending in the community, with shops closing.
4. Areas of high unemployment can suffer more crime and other social problems.

The government and the whole economy lose out

1. The government pays more in benefits to support the unemployed.
2. It also collects less in tax, because fewer people earn income and spend.
3. This can push the government's budget into deficit.
4. The economy loses the output those workers could have produced, so total output is lower than it could be.

The size of the impact depends on the situation

1. Short spells of unemployment do less harm than long-term unemployment.
2. A strong benefits system can soften the impact on living standards.
3. The wider damage is greater when unemployment is high and widespread.

Demand-side policy targets cyclical unemployment

1. Cyclical unemployment is caused by weak demand, so governments can use fiscal policy: increasing government spending or cutting taxes to raise spending in the economy.
2. The Bank of England can use monetary policy: cutting Bank Rate to make borrowing cheaper, encouraging firms and households to spend and invest more.
3. As demand recovers, firms need more workers, so cyclical unemployment falls.

Fiscal policy is covered in full in 2.3.1a, 2.3.1b and 2.3.1c, and monetary policy in 2.3.2a and 2.3.2b.

Supply-side policy targets structural unemployment

1. Structural unemployment is caused by a mismatch between workers' skills or location and the jobs available, so it needs policies that improve the workforce rather than simply raising demand.
2. Government-funded training and retraining schemes help workers whose old skills are no longer in demand gain skills employers want.
3. Job centres and careers advice help match unemployed workers to available vacancies, including in other areas.
4. These are examples of supply-side policy, which is covered in full in 2.3.3; here they matter because they reduce the mismatch behind structural unemployment.

How far unemployment policies work depends on the type

1. It depends on which type of unemployment is being tackled, because demand-side policy can quickly cut cyclical unemployment but does little for structural unemployment caused by a skills mismatch.
2. It depends on time lags, because interest rate changes and training schemes both take months or years to change spending and skills, so policies do not fix unemployment overnight.
3. It depends on the risk of side effects, because demand raised too far can cause inflation, and spending on training and benefits must be paid for through taxes or borrowing.
4. It depends on how well policy is targeted, because retraining and job centre support work best when aimed at the specific skills and locations where structural unemployment is highest.
5. Overall, therefore, no single policy solves every type of unemployment: demand-side policy suits a cyclical downturn, while supply-side policy is needed for the longer-term mismatch behind structural unemployment.

2.2.4a What inflation is

Inflation is a sustained rise in prices

1. Prices for individual goods and services rise and fall all the time, for all sorts of different reasons.
2. Inflation is about what happens to prices on average across the whole economy, not the price of any single item.

1. A single price shock, such as a bad harvest pushing up the price of potatoes, is not inflation on its own.
2. It only counts as inflation once it feeds through into a sustained rise across prices generally, not just one product.
3. The Office for National Statistics (ONS) announces the UK rate of inflation each month.

Falling inflation is not falling prices

1. The rate of inflation can rise or fall from month to month, and this often confuses the word falling.
2. If the rate falls from, say, 6 per cent to 3 per cent, prices are still rising, just more slowly than before.

1. UK CPI inflation fell from 2.8 per cent in May 2026 to 2.6 per cent in June 2026: prices were still rising each month, just at a slightly slower annual pace, so this was disinflation, not deflation.
2. Deflation is rare in the UK. It would show up as a negative CPI rate, for example minus 1 per cent, meaning the general price level had actually fallen.

Price stability keeps the economy predictable

1. Governments and central banks aim for price stability: low and steady inflation, rather than rapid swings in either direction.
2. Very high inflation makes it hard for households and firms to plan, because money loses its value quickly and unpredictably.
3. Deflation can also cause problems, because if people expect prices to keep falling they may delay spending, which can weaken the economy further.
4. For this reason, a small, stable, positive rate of inflation is usually judged healthier than either high inflation or deflation.

2.2.4b Measuring inflation with the CPI

The CPI tracks a basket of typical spending

1. UK inflation is measured using the Consumer Prices Index, published every month by the ONS.
2. It is built from the changing cost of a fixed list of goods and services that a typical household buys.

Items in the basket are weighted by spending

1. Each item in the basket is given a weight based on how much of their income households spend on it.
2. Items households spend a lot on, such as housing and food, carry a larger weight than items bought rarely.
3. A price rise in a heavily weighted item moves the CPI more than the same rise in a lightly weighted item.
4. The weights are updated each year from surveys of what households actually spend their money on.

A price index turns basket cost into one number

1. The total cost of the basket is turned into a price index, a single number that makes it easy to compare years.
2. An index above 100 means prices are higher than in the base year; an index below 100 means they are lower.
3. For example, an index of 105 means prices are 5 per cent higher than in the base year.
4. A price index can be calculated directly from the cost of the same basket in two different years.

Two CPI index numbers give the inflation rate

1. The rate of inflation can be calculated directly from the CPI index for two different periods, without needing the basket cost itself.
2. CPIH is a similar measure that also includes the costs of owning and living in your own home; CPIH inflation was 3.1 per cent in July 2026, slightly higher than CPI.

CPI figures show whether people are truly better off

1. Comparing cash figures across years can be misleading, because £1 today does not buy what it did a year ago.
2. Dividing a cash value by the price index, then multiplying by 100, adjusts it for inflation so it can be fairly compared between years.
3. If wages rise by 2 per cent while CPI inflation is 2.9 per cent, workers can afford less even though their pay has gone up in cash terms.

2.2.4c Causes, consequences and control of inflation

Demand-pull inflation comes from too much spending

1. Demand-pull inflation happens when total spending in the economy rises faster than firms can supply goods.
2. When many buyers compete for a limited supply of goods, sellers can raise their prices.
3. Lower interest rates can trigger this by making borrowing and spending cheaper, motivating the people in the economy to spend more.
4. Rising incomes, greater confidence and higher demand for exports can also push total spending up.

Cost-push inflation comes from rising business costs

1. Cost-push inflation happens when firms face higher costs and pass them on as higher prices.
2. Higher wages: raise the cost of employing workers.
3. Higher raw material and energy prices: make it dearer to produce goods.
4. A weaker pound: raises the price of imported materials, and higher taxes on firms add to costs too.

Spot the cue that signals each type

1. To identify the cause in an exam question, ask whether the pressure is coming from demand or from costs.

Inflation creates winners and losers

1. Savers: tend to lose, because the money they have saved buys less over time.
2. This is worst when the interest earned on savings is lower than inflation.
3. Borrowers: can gain, because they repay a fixed debt with money that is worth less than when they borrowed it.

Workers and those on fixed incomes feel the squeeze

1. If wages rise more slowly than prices, real wages fall and workers can afford less.
2. People on fixed incomes, such as some pensioners, lose out because their income does not rise with prices.
3. Workers may respond by demanding pay rises to keep up with the cost of living.

Firms face extra costs and uncertainty

1. Firms face extra costs when they have to change their prices often.
2. High inflation also creates uncertainty, which makes it harder for firms to plan and invest for the future.
3. Low and stable inflation avoids most of these costs, which is why it is generally preferred to high inflation.

Exporters can lose competitiveness abroad

1. If UK prices rise faster than prices abroad, UK goods become more expensive for foreign buyers.
2. This can cause exports to fall as customers overseas switch to cheaper suppliers.
3. Cheaper imports may also become more attractive than UK-made goods, hurting domestic firms.
4. The overall impact depends on how high and how predictable the inflation is, since low steady inflation causes far fewer problems than rapid rises.

The Bank of England and the Government can act

1. The main tool for controlling inflation in the UK is monetary policy, where the Bank of England raises interest rates to cool spending. Monetary policy is covered fully in 2.3.2.
2. Higher interest rates make borrowing dearer and saving more rewarding, which slows demand-pull inflation by reducing total spending.
3. The Government can also use fiscal policy (2.3.1), such as raising taxes or cutting its own spending, to reduce demand in the same way.
4. These demand-side policies work best against demand-pull inflation. Cost-push inflation, driven by rising costs rather than excess spending, is much harder for them to fix quickly.

How well anti-inflation policy works depends on the cause

1. It depends on the cause of the inflation, because higher interest rates slow demand-pull inflation well, but do little to stop cost-push inflation caused by rising energy or import prices.
2. It depends on who is affected, because higher interest rates help savers and squeeze borrowers, the opposite of what unchecked inflation does to each group.
3. It depends on the size of the change needed, because a small rate rise may be absorbed easily, while a large rise needed to control high inflation can slow growth and cost jobs.
4. It depends on time lags, because interest rate changes can take many months to feed through the economy, so policy may be acting on out-of-date information.

2.2.5a Balance of trade and balance of payments

The balance of payments records dealings with the world

1. The balance of payments is a record of all the money flowing between one country and the rest of the world over a period of time.
2. Money coming into the country counts as an inflow, and money leaving the country counts as an outflow.
3. At GCSE level this is studied mainly through its current account, which covers trade and income.

The current account is built from four parts

1. Trade in goods is usually the largest component for a manufacturing economy: money changes hands whenever cars, oil, machinery or food cross the border, whether coming in as an import or going out as an export.
2. Trade in services covers money earned or spent on invisible products, such as a UK bank charging fees to an overseas client, or a British tourist paying for a hotel room abroad.
3. Primary income flows from owning assets or working abroad, such as the dividends a UK shareholder receives from a foreign company, or the wages earned by a UK resident working temporarily overseas.
4. Secondary income covers transfers with nothing given in return, such as UK government aid paid to another country, or money a foreign worker living in the UK sends home to their family.
5. Adding the four parts together gives the current account balance for that period.

Goods are visible trade and services are invisible

1. Trade in goods is often called visible trade because the physical products can be seen crossing the border.
2. Trade in services is often called invisible trade because no physical item moves, even though money still changes hands.

1. The balance of trade only covers goods and services; the current account balance additionally includes primary and secondary income.

The current account balance compares inflows with outflows

1. The current account balance for a period is total inflows minus total outflows.
2. A positive balance is called a surplus; a negative balance is called a deficit; their fuller meaning is covered in 2.2.5b.
3. The balance is often shown as a percentage of GDP so that economies of different sizes can be compared fairly.

Adding the four parts gives the overall balance

1. The overall current account balance is found by adding the balances of all four parts together.

2.2.5b Current account surpluses and deficits

Surplus and deficit describe opposite imbalances

1. A surplus arises when inflows exceed outflows: a country that earns £600bn from foreigners and pays out £550bn to foreigners has inflows above outflows, so it runs a surplus.
2. A deficit arises when outflows exceed inflows: a country that pays out more than it earns over the same period runs a deficit.

A balanced position means inflows exactly equal outflows

The causes of an imbalance work through trade

1. A deficit or surplus depends on the value of what a country sells abroad compared with the value of what it buys.
2. Relative prices and costs: matter, because if a country's goods become dearer than rivals' goods, exports fall and imports rise.
3. Quality and competitiveness: matter, because poor design, reliability or service makes goods harder to sell abroad and easier for rivals to beat at home.
4. The exchange rate: matters, because a strong currency makes exports dearer and imports cheaper, while a weak currency does the opposite; exchange rates are covered fully in 2.4.2.
5. Relative growth and incomes: matter, because a country that grows faster or has higher incomes than its trading partners tends to buy more imports.

Faster growth than partners tends to widen a deficit

1. When incomes rise, households spend more, and part of that extra spending goes on imported goods and holidays abroad.
2. If a country grows faster than its trading partners, its demand for imports rises faster than their demand for its exports.
3. A persistent imbalance usually comes from a lasting problem, such as weak competitiveness or a currency that stays too strong for too long.

A deficit or surplus changes demand in the economy

1. Spending on imports is money leaving the economy, so a deficit is a net leakage of demand.
2. Earnings from exports are money entering the economy, so a surplus is a net injection of demand.
3. This is why a large, persistent imbalance can affect output, jobs, prices and the currency.

The main consequences of a persistent deficit

1. Slower growth and fewer jobs: can follow, because a net leakage of demand reduces spending on domestic output.
2. A financing need: arises, because a deficit must be paid for by borrowing from abroad or selling assets to foreigners.
3. Downward pressure on the currency: can build up, because a persistent deficit means more of the currency is being sold to buy imports.

A surplus brings benefits but is not always good

1. A surplus adds to demand and can support output and jobs in export industries.
2. A very large surplus can point to weak spending at home, or add to inflation if the extra demand is strong.
3. A large surplus can also cause tension with trading partners who are running deficits.

Whether a deficit matters depends on several factors

1. It depends on the size of the deficit relative to GDP, because a small deficit is easy to finance, while a large, persistent one signals a deeper problem.
2. It depends on what is causing it, because a deficit caused by importing machinery to invest for the future may pay off later, while one caused by weak competitiveness can persist and worsen.
3. It depends on how it is financed, because a deficit financed by stable, long-term investment is less risky than one financed by short-term borrowing that could be withdrawn quickly.
4. It depends on how long it lasts, because a temporary deficit during one strong year of investment is less concerning than one that persists year after year.

2.2.5c Policies to influence the balance of payments

Governments can act on demand, trade or competitiveness

1. To correct a deficit a government can try to reduce total spending, switch spending away from imports, or make its firms more competitive.
2. The aim is to bring inflows and outflows closer together so the balance is more stable.
3. Some measures work quickly on demand, while others work slowly by improving the supply side of the economy.

Expenditure-reducing policy cuts total demand in the economy

1. Expenditure-reducing policy lowers growth and can raise unemployment, because it cuts demand across the whole economy, not just spending on imports.
2. This also often leads the general price level to fall.

Expenditure-switching policy shifts spending towards home producers

1. Expenditure-switching policy can raise the price of imports, which adds to the cost of living, and a lower exchange rate is covered fully in 2.4.2.

Tariffs and quotas are the main protectionist tools

1. Tariff: a tax on imports; it raises the price shoppers pay, so some switch to home-produced substitutes, imports fall and the current account improves, and it also raises government revenue.
2. Quota: a limit on the quantity that may be imported; it caps supply directly, so home producers fill the gap and the price often rises too, but unlike a tariff it raises no government revenue.
3. The catch: other countries can retaliate, cutting UK exports, and the UK's trade agreements limit what it can impose; both tools are covered in full in 2.4.3a.

Supply-side policy raises long-term competitiveness and quality

1. Supply-side measures are usually slow to work and can be costly for the government to fund.
2. The mechanism: supply-side policy targets producers' competitiveness rather than demand, so better quality, lower costs and higher productivity make UK goods easier to sell abroad and home substitutes more attractive than imports.

Two routes build long-run competitiveness

1. Investment in skills and infrastructure: education, training and research and development raise workers' productivity and lower firms' costs.
2. Lower taxes on profits: this encourages firms to invest in both areas.
3. The limitation: these routes work slowly, over years not months, so they do nothing for this year's deficit and cost money upfront; covered in full in 2.3.3a and 2.3.3b.

Choosing a policy means weighing cause against cost

1. It depends on what is causing the deficit, because a demand-driven deficit responds well to expenditure-reducing policy, while a competitiveness problem needs supply-side reform instead.
2. It depends on the impact on growth and jobs, because expenditure-reducing policy can correct the balance but slow the whole economy and raise unemployment.
3. It depends on how trading partners react, because tariffs and other protectionist measures can invite retaliation that leaves both countries worse off.
4. It depends on how quickly a result is needed, because supply-side measures can work well but take years, while demand-side measures act faster at a higher immediate cost.

2.2.6a Income and wealth inequality in the UK

Income is a flow; wealth is a stock

1. The main sources of income are wages and salaries from work, interest on savings, rent from property and benefits paid by the government.
2. Common forms of wealth include a home, savings, shares and a pension fund.
   1. A person can have a high income but little wealth if they spend most of what they earn, such as a young footballer early in a well-paid career.
   2. A person can have a low income but high wealth, such as a retired homeowner living off savings.

Inequality means income and wealth are shared unevenly

1. Income inequality compares how the flow of earnings is divided, while wealth inequality compares how ownership of assets is divided.
2. Some inequality exists in every economy, because people differ in their jobs, savings and stage of life.

You can describe the gap using shares and quintiles

1. Economists split households into quintiles and compare the share of total income or wealth held by each group.
2. The mean (average) can be pulled up by a few very high figures, so the median (middle value) often describes the typical household better.
   1. When reading a distribution table, check whether the figures show income or wealth, and compare the top group's share against the bottom group's share to judge how uneven the spread is.

ONS data shows the size of the UK gap

1. In the financial year ending (FYE) 2024 (April 2023 to March 2024), the UK's Gini coefficient for disposable income was 32.9%, according to the Office for National Statistics (ONS).
   1. This was down slightly from 33.1% in FYE 2023, though the change was not large enough to be statistically significant.
2. Median household disposable income in the UK was £36,700 a year in FYE 2024, up 0.8% on FYE 2023 and back in line with pre-pandemic (FYE 2020) levels.
3. Both figures describe the distribution of income, not wealth: the ONS does not publish an equivalent Gini coefficient for wealth in this dataset.

The quintile ratio shows the richest to poorest gap

1. In FYE 2024, the UK's quintile ratio was 5.6, meaning the richest fifth of households had around 5.6 times the disposable income of the poorest fifth, according to the ONS.

Quintile ratios help compare inequality over time

1. On these illustrative figures, the richest fifth's mean income would be about £84,000 a year, roughly £69,000 more than the poorest fifth.

2.2.6b Causes and consequences of inequality

Differences in skills and wages widen income gaps

1. Wage differences: are a major cause of income inequality, because some jobs pay far more than others.
2. Education and skills: raise earning power, so a more qualified worker can usually command a higher wage.
3. Workers with few qualifications are often stuck in low-paid jobs, which widens the income gap.
4. Bargaining power: matters too, as workers in short supply, or represented by a strong trade union, can push wages up.

Employment status affects who earns an income

1. Unemployment: removes earnings from work, so households relying on benefits usually have low incomes.
2. Insecure or part-time work: provides fewer hours and lower pay than a full-time job.
3. People who cannot find full-time work, or who work only a few hours, fall further behind full-time earners.

Region and discrimination also widen the gaps

1. Region: average pay and job opportunities are not the same across the UK; ONS figures consistently show household incomes are higher in London and the South East than in the North East and Wales.
2. Discrimination: occurs when people are paid or treated differently because of their gender, ethnicity or disability rather than their skills or productivity.
   1. The ONS's annual gender pay gap statistics are a real, ongoing example of how discrimination and occupational differences can leave one group earning less on average than another for broadly similar work.

The causes reinforce one another over time

1. Low wages make it hard to save, so little wealth builds up.
2. Without wealth there is nothing to inherit, so the gap can pass to the next generation.
3. Because these causes feed into each other, inequality can persist unless something breaks the cycle.

Owning assets and inheritance widen wealth gaps

1. Ownership of assets: creates wealth inequality, because those who own homes, shares or businesses earn rent, dividends and rising asset values.
2. People who already have wealth can save and invest more, so their wealth grows faster.
3. Inheritance: passes wealth from one generation to the next, giving some families a head start.
4. Those who inherit property or money can buy assets early in life, while others start with nothing.

Inequality can harm living standards and society

1. Inequality can leave those at the bottom in poverty, unable to afford a decent standard of living.
2. Poorer households often have worse health and education, because they cannot afford good food, housing or extra support.
3. Large gaps can reduce social mobility, making it harder for children from poor families to move up.
4. Very wide gaps can create social tension and resentment between groups.

Wide inequality can weaken the economy

1. Poorer households spend a larger share of any income, so weak incomes at the bottom can reduce total spending in the economy.
2. Wasted potential lowers productivity, as skills go undeveloped when people cannot afford training.
3. Governments may have to spend more on benefits and public services to support low-income households.

Some inequality can create useful incentives

1. Some inequality can act as an incentive, rewarding effort, skill and risk-taking.
2. The chance to earn more encourages people to gain skills, work hard and take on responsibility.
3. The prospect of higher rewards encourages enterprise, as people start businesses hoping to succeed.
4. Higher earners can save and invest, which may help fund investment and growth.

Whether inequality helps or harms depends on degree

1. It depends on how large the gap is, because a little inequality can motivate effort, while an extreme gap tends to cause more harm than good.
2. It depends on social mobility, because if people born into poorer households can realistically move up, the same size of gap causes less lasting harm.
3. It depends on what higher earners do with their money, because savings and investment by high earners only benefit growth if that money is actually invested, rather than left idle.
4. On balance, a moderate degree of inequality can reward effort without much cost, but very wide and persistent gaps usually do more economic and social harm than good.

2.2.6c Redistributing income and wealth

Redistribution moves resources from richer to poorer households

Progressive taxation takes more from higher earners

1. Income tax: a progressive tax, charged in bands, so higher slices of income are taxed at higher rates.
2. For the 2026/27 tax year, the first £12,570 of income (the Personal Allowance) is tax-free.
   1. Income from £12,571 to £50,270 is taxed at the basic rate of 20%.
   2. Income from £50,271 to £125,140 is taxed at the higher rate of 40%.
   3. Income over £125,140 is taxed at the additional rate of 45%.
3. Taxes on wealth, such as inheritance tax, take a share of large estates when they are passed on.
4. Because higher earners pay a higher percentage, not just a higher amount, this means those most able to pay contribute the most.

Benefits and transfer payments support low-income households

1. Benefits: such as Universal Credit and Child Benefit are cash transfer payments, meaning payments made with no good or service given directly in return, to households on low incomes.
2. Some benefits are means-tested, going only to those below a certain income, while others such as the State Pension are paid more widely.

State provision of education and healthcare narrows gaps

1. State provision: giving services free or cheaply at the point of use, such as NHS healthcare and state education.
2. These services are worth more to poorer households as a share of their income, since a family on a low income could not otherwise easily afford them.
3. Providing free state schooling and free NHS treatment is a form of redistribution in kind, rather than in cash.

How far redistribution helps depends on its design

1. It depends on how high marginal tax rates are set, because very high rates on extra earnings can reduce the incentive to work longer hours or take a promotion.
2. It depends on how well targeted benefits are, because means-tested support reaches low-income households efficiently, while poorly designed schemes can be wasteful or blunt the incentive to find work.
3. It depends on the value of in-kind support, because free healthcare and education raise living standards for low-income households even in years when cash benefits are not increased by much.
4. Redistribution through tax and spending narrows inequality most effectively when it is well targeted and does not remove the reward for work.