Who are the winners and losers from inflation?


Inflation is a continuous rise in the price level. Inflation means the value of money will fall and purchase relatively fewer goods than previously. In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay …

Read moreWho are the winners and losers from inflation?

Demand-pull inflation

UK cpi-inflation-89-19

Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand. It occurs when economic growth is too fast. If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation. Inflation – a sustained increase in the price level. Demand-pull inflation – …

Read moreDemand-pull inflation

The broken window fallacy


The broken window fallacy states that if money is spent on repairing the damage, it is a mistake to think this represents an increase in economic output and economic welfare. If money is spent on repairing a broken window, the opportunity cost is that individuals cannot spend money on more productive goods. The broken window …

Read moreThe broken window fallacy

Definition of Full Employment

ad increase - inflation

Readers Question: explain how economists define ‘full employment’?

The first definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job.

This would imply that unemployment is zero because if you are not willing to work then you should not be counted as unemployed. To be classified as unemployed you would need to be actively seeking work. This does not mean everyone of working age is in employment. Some adults may leave the labour force, for example, women looking after children.

But, in practice, we never see 0% unemployment, and this can make full employment hard to define. Generally, an unemployment rate of 3% or less would be considered to be full employment.

Optimal Unemployment Level

Another definition of full employment would be the ‘optimal’ level of unemployment. In practice, an economy will never have zero unemployment because there is inevitably some frictional unemployment. This is the unemployment where people take time to find the best job for them. Frictional unemployment is not necessarily a bad thing. It is better people take time to find a job suitable for their skill level, rather than get the first job that comes along. Generally, you may expect frictional unemployment to cause an unemployment rate of 2-3%. Therefore, some economists may claim that unemployment of less than 3% indicates ‘full employment’ – or at least very close.

Full Employment and Full Capacity

Another way to think of full employment is when the economy is operating at an output level considered to be at full capacity. i.e. it is not possible to increase real output because all resources are fully utilised. This would be a point on a production possibility frontier. It can also be shown in an AD/AS diagram.

Read moreDefinition of Full Employment

Different types of inflation


Inflation means a sustained increase in the general price level. The main two types of inflation are

  1. Demand-pull inflation – this occurs when the economy grows quickly and starts to ‘overheat’ – Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS).
  2. Cost-push inflation – this occurs when there is a rise in the price of raw materials, higher taxes, e.t.c

We can also categorise inflation by how fast the price increases are, such as:

  • Disinflation – a falling rate of inflation
  • Creeping inflation – low, but consistently creeping up.
  • Walking/moderate inflation –  (2-10%)
  • Running inflation (10-20%)

Types include of inflation include


1. Demand-pull inflation

This occurs when AD increases at a faster rate than AS. Demand-pull inflation will typically occur when the economy is growing faster than the long-run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.

A simple diagram showing demand-pull inflation

ad increase - inflation
The UK experienced demand-pull inflation during the Lawson boom of the late 1980s. Fuelled by rising house prices, high consumer confidence and tax cuts, the economy was growing by 5% a year, but this caused supply bottlenecks and firms responded by putting up prices. Therefore the inflation rate crept up.


This graph shows inflation and economic growth in the UK during the 1980s. High growth in 1987, 1988 of 4-5% caused an increase in the inflation rate. It was only when the economy went into recession in 1990 and 1991, that we saw a fall in the inflation rate. See: Demand-pull inflation.

2. Cost-push inflation

This occurs when there is an increase in the cost of production for firms causing aggregate supply to shift to the left. Cost-push inflation could be caused by rising energy and commodity prices. See also: Cost-Push Inflation

Diagram showing cost-push inflation.

Example of cost-push inflation in the UK

UK inflation- 2017

In early 2008, the UK economy entered a deep recession (GDP fell 6%). However, at the same time, we experienced a rise in inflation. This inflation was definitely not due to demand-side factors; it was due to cost push factors, such as rising oil prices, rising taxes and rising import prices (as a result of depreciation in the Pound) By 2013, cost-push factors had mostly disappeared and inflation had fallen back to its target of 2%. After the June 2016 Brexit referendum, Sterling fell another 13% causing another period of cost-push inflation in 2017.

Sometimes cost-push inflation is known as the ‘wrong type of inflation‘ because this inflation is associated with falling living standards. It is hard for the Central Bank to deal with cost push inflation because they face both inflation and falling output.

Read moreDifferent types of inflation

Environmental impact of economic growth


Economic growth means an increase in real output (real GDP). Therefore, with increased output and consumption we are likely to see costs imposed on the environment. The environmental impact of economic growth includes the increased consumption of non-renewable resources, higher levels of pollution, global warming and the potential loss of environmental habitats. However, not all …

Read moreEnvironmental impact of economic growth

Macroeconomic Controversies


There are many areas of economics where respected economists may take up contrary opinions. Some of the main macroeconomic controversies include Keynesian vs Monetarist views on managing the economic cycle (role of fiscal policy) Real business cycle theories – the argument the economic cycle comes from supply, not demand. Whether there is a trade-off between …

Read moreMacroeconomic Controversies

Economic inactivity – definition and causes


Definition: Economic inactivity means that people (aged 16-64) are not involved in the labour market – they are neither working or actively seeking employment. Economic inactivity includes students, early retirees and the long-term sick. There are 8.5 million counted as economically inactive in the UK. The unemployed who are seeking working and willing and able …

Read moreEconomic inactivity – definition and causes

Item added to cart.
0 items - £0.00