Economic Performance Indicators: GDP, Inflation, and Unemployment

Economic performance

How an economy is prospering, typically assessed in terms of the achievement of economic policy objectives.

Three main indicators of a country's economic performance

Economic growth, inflation rate, and unemployment rate.

Economic growth defined

The increase in the goods and services produced by an economy over a long period, measured as a percentage increase in real GDP.

What is GDP

The market value of all final goods and services produced by a country in a given period of time.

Formula for calculating GDP using expenditure

Aggregate expenditure = C + I + G + (X-M), where C is consumption, I is private investment, G is government spending, and (X-M) is net export spending.

What influences consumer spending (C) in the context of GDP?

Disposable income, interest rates, and wealth.

Consumer Price Index (CPI)

An indicator of inflation that measures the change in the price of a 'basket' of goods and services consumed by the average household.

Demand-pull inflation

Inflation that occurs when strong demand outstrips supply, resulting in increased prices.

Cost-push inflation

Inflation that occurs when production costs rise, forcing the price of products to increase.

Hyperinflation

A rapid and out-of-control form of inflation.

Stagflation

A situation where inflation rises despite slow economic growth and high unemployment.

Australian government's target for economic growth

Around 3-4% per year.

Australian government's inflation target

2-3% inflation per annum.

Frictional unemployment

Unemployment that occurs when individuals are temporarily between jobs.

Cyclical unemployment

Unemployment that occurs due to a decrease in demand for goods and services.

Structural unemployment

Unemployment that arises from changes in industries, leading to a mismatch between available jobs and the skills of job seekers.

Underemployment

When individuals are employed but wish to work more hours, often affecting part-time workers.

Seasonal unemployment

Unemployment that occurs during specific times of the year, primarily in tourism and agriculture.

Hidden unemployment

Individuals who are not counted as unemployed but would work if opportunities were available.

Relationship between GDP and unemployment

When GDP goes down, the unemployment rate increases, indicating an inverse relationship.

Expansion phase of the business cycle

Increase in production, decrease in unemployment, increase in prices, and increase in consumer spending.

Peak phase of the business cycle

The economy operates at full capacity, with low unemployment and high production levels.

Contraction phase in the business cycle

Decrease in production, increase in unemployment, decrease in prices, and decrease in consumer spending.

Recession

A period where output falls for a sustained time, leading to an increase in unemployment.

Depression

A very severe recession characterized by a large contraction in the economy and high unemployment levels.

Impact of high consumption on inflation

High consumption can lead to demand-pull inflation, where demand outstrips supply, causing prices to rise.

Inflation rate definition

An increase in the level of prices of the goods and services that households buy. it is measured as the rate of change of those prices using the Consumer Price Index. The rate of change indicates the performance of a country.

Unemployment rate definition

The number of unemployed persons expressed as a percentage of the labour force. It is an important indicator of the performance of the economy and has a major influence on government policy.

Australia’s cash rate target

3.85%

Australia’s economic growth rate

1.3%

Australia’s inflation rate

2.4%

Australia’s unemployment rate

4.1%

Australia’s wage growth

3.4%

Relationship between inflation and the business cycle

Inflation rises during the expansion phase as demand goes up and prices increase and tends to decrease during the contraction phase

Relationship between unemployment and the business cycle

When the economy expands, unemployment decreases due to more workers being hired and needed; conversely, during economic contractions, unemployment increases as businesses lay off workers to maintain enough money.

Relationship between economic growth and the business cycle

When economic growth increases, the business cycle is experiencing an expansion and vice versa.

How is inflation measured?

Inflation is generally measured by tracking the percentage change in the price of a basket of goods and services over time. The most common method is the Consumer Price Index (CPI), which reflects the cost of household expenditures. 

How is economic growth measured?

Primarily measured by Gross Domestic Product (GDP), which represents the total value of goods and services produced within a country's borders over a specific period, usually a year or a quarter. To get a clearer picture of actual economic expansion, economists often focus on real GDP, which is adjusted for inflation, so it reflects the change in the volume of goods and services produced, not just the change in prices. 

Impacts of increases/decreases in GDP/Inflation/Unemployment on households/firms