Example:

If you buy a laptop for $$400$ with $500 GB$ of storage, upgrade it to $700 GB$ , and then sell it for $$500$ , that price increase isn’t inflation. The product is more valuable because it has better features. But if the same laptop (with no upgrades or improvements) costs $$400$ this year and $$500$ next year, that price increase is inflation.

Inflation is never good for an economy due to the following effects:

It reduces the business confidence in an economy
It reduces the buying power of the consumers
Reduces the demand of goods and services
It makes exports expensive

Unemployment

Definitions

Unemployment: When an economy can’t provide jobs for people who are able and willing to work. This includes both:

general (unskilled) work, and
jobs that require specific skills.

Unemployment is another key indicator of economic health, as it shows how well an economy is creating jobs for its population.

Example:

In South Africa, unemployed individuals who qualify for benefits may receive income through government grants. In the 2022–2023 financial year, according to Statistics South Africa, the government spent over 1.12 trillion rand, which is approximately $$63, 454, 294, 400$ USD.

Unemployment is never good for an economy due to the following effects:

It affects the demand of goods and services
It leads to social effects e.g. crime, violence, vandalism, riots and more
It’s costly for the government because they will have to spend more to support the unemployed

Economic growth

Economic growth is a broad topic that includes many factors. A useful starting point is to look at trade cycles.

Trade cycles

Definitions

Trade cycle: A trade cycle describes the long-term movement of an economy over time.

Economies usually aim to grow gradually, but growth rarely follows a perfectly straight line. Instead, the economy tends to fluctuate up and down over time, even when the overall direction is upward, downward, or flat.

A flat trend where its not moving outward ot downward — Trend graph

The trend graph above shows that the economy is neither increasing nor decreasing, so the trend is flat. You can see this because the trend line lies $18 0^{\circ}$ horizontally.

There are 5 stages in the fluctuation process:

Trough
Recession
Expansion
Recovery
Peak

Trend

Definitions

Trend: A trend isn’t a stage of the cycle. It’s the general direction the economy is moving in.

A trend line is used to show the overall direction of the economy over time. Even though the economy moves up and down in cycles, the trend helps you see whether it is generally growing, shrinking, or staying the same.

A trend line can also look like this:

An upward moving trend meaning in this case the trend wont be on the same position as it was before because its increasing — Representation of phases of a business cycle

The representation of phases of a business cycle graph (above) shows a trend line that slopes gently upward, which indicates that the economy is growing.

Trade cycle stages

Keep in mind the 5 stages of a trade cycle we mentioned. They happen around the trend line, with some stages above it and some below it, as shown in the graphs.

Definitions

Trough: This is the lowest point in the cycle. When the economy reaches this point, it has hit rock-bottom, meaning the next movement is typically upward.
Recession: This is the opposite of expansion. The economy experiences deflationary pressures and this normally happens after the boom period. It is caused by a decrease in demand, which then causes a decrease in inflation.
Expansion: After momentum builds, the economy grows more strongly. Business confidence starts to return, demand rises, and inflationary pressures may increase because demand is high. The government may need to implement measures to reduce that.
Recovery: This is the stage where the economy starts moving away from the trough. Output begins to rise and the economy starts building momentum.
Peak: This is the stage where the economy grows at an exponential rate, which can be damaging in the long term. High demand (because consumers can afford more) creates even more inflationary pressure as suppliers race to meet demand. This stage is also referred to as the boom, meaning after this point the economy will start to move into recession.

Inflation

Price increase without matching value increase
Reduces business confidence and consumer buying power
Lowers demand for goods/services, makes exports expensive

Unemployment

Occurs when willing workers can’t find jobs (skilled or unskilled)
Lowers demand for goods/services, increases government spending
Leads to negative social effects (crime, violence, riots)

Economic growth

Measured by long-term movement (trend) of the economy
Growth rarely follows a straight line; fluctuates over time

Trade cycles

Five stages: Recession, Trough, Recovery, Expansion, Peak (Boom)
Stages occur above/below the trend line

Trend

General direction of the economy (upward, downward, flat)
Trend line shows overall economic movement, not specific stages

Stages of the trade cycle

Trough: lowest point, signals upward movement ahead
Recovery: output rises, momentum builds
Expansion: strong growth, rising demand, possible inflation
Boom/Peak: rapid growth, high demand, high inflation risk
Recession: falling demand, deflationary pressures, follows boom

Next | 3.3 Circular flow model

Economic growth

Inflation

Definitions

Inflation: An increase in the prices of goods and services without a matching increase in their value.

Inflation is one of the key measures of how an economy is performing, as it affects both businesses and consumers.

To understand this more clearly, it helps to compare inflation with situations where prices increase for valid reasons.

Example:

If you buy a laptop for $$400$ with $500 GB$ of storage, upgrade it to $700 GB$ , and then sell it for $$500$ , that price increase isn’t inflation. The product is more valuable because it has better features. But if the same laptop (with no upgrades or improvements) costs $$400$ this year and $$500$ next year, that price increase is inflation.

Inflation is never good for an economy due to the following effects:

It reduces the business confidence in an economy
It reduces the buying power of the consumers
Reduces the demand of goods and services
It makes exports expensive

Unemployment

Definitions

Unemployment: When an economy can’t provide jobs for people who are able and willing to work. This includes both:

general (unskilled) work, and
jobs that require specific skills.

Unemployment is another key indicator of economic health, as it shows how well an economy is creating jobs for its population.

Example:

In South Africa, unemployed individuals who qualify for benefits may receive income through government grants. In the 2022–2023 financial year, according to Statistics South Africa, the government spent over 1.12 trillion rand, which is approximately $$63, 454, 294, 400$ USD.

Unemployment is never good for an economy due to the following effects:

It affects the demand of goods and services
It leads to social effects e.g. crime, violence, vandalism, riots and more
It’s costly for the government because they will have to spend more to support the unemployed

Economic growth

Economic growth is a broad topic that includes many factors. A useful starting point is to look at trade cycles.

Trade cycles

Definitions

Trade cycle: A trade cycle describes the long-term movement of an economy over time.

The trend graph above shows that the economy is neither increasing nor decreasing, so the trend is flat. You can see this because the trend line lies $18 0^{\circ}$ horizontally.

There are 5 stages in the fluctuation process:

Trough
Recession
Expansion
Recovery
Peak

Trend

Definitions

Trend: A trend isn’t a stage of the cycle. It’s the general direction the economy is moving in.

A trend line can also look like this:

The representation of phases of a business cycle graph (above) shows a trend line that slopes gently upward, which indicates that the economy is growing.

Trade cycle stages

Keep in mind the 5 stages of a trade cycle we mentioned. They happen around the trend line, with some stages above it and some below it, as shown in the graphs.

Definitions

Trough: This is the lowest point in the cycle. When the economy reaches this point, it has hit rock-bottom, meaning the next movement is typically upward.
Recession: This is the opposite of expansion. The economy experiences deflationary pressures and this normally happens after the boom period. It is caused by a decrease in demand, which then causes a decrease in inflation.
Expansion: After momentum builds, the economy grows more strongly. Business confidence starts to return, demand rises, and inflationary pressures may increase because demand is high. The government may need to implement measures to reduce that.
Recovery: This is the stage where the economy starts moving away from the trough. Output begins to rise and the economy starts building momentum.
Peak: This is the stage where the economy grows at an exponential rate, which can be damaging in the long term. High demand (because consumers can afford more) creates even more inflationary pressure as suppliers race to meet demand. This stage is also referred to as the boom, meaning after this point the economy will start to move into recession.

CGMA BA1

3. The domestic economy

Our CGMA course is currently in development and is a work-in-progress.

Economic growth

5 min read

Font

Discuss

Feedback

Inflation

Definitions

Inflation: An increase in the prices of goods and services without a matching increase in their value.

Inflation is one of the key measures of how an economy is performing, as it affects both businesses and consumers.

To understand this more clearly, it helps to compare inflation with situations where prices increase for valid reasons.

Example:

If you buy a laptop for $$400$ with $500 GB$ of storage, upgrade it to $700 GB$ , and then sell it for $$500$ , that price increase isn’t inflation. The product is more valuable because it has better features. But if the same laptop (with no upgrades or improvements) costs $$400$ this year and $$500$ next year, that price increase is inflation.

Inflation is never good for an economy due to the following effects:

It reduces the business confidence in an economy
It reduces the buying power of the consumers
Reduces the demand of goods and services
It makes exports expensive

Unemployment

Definitions

Unemployment: When an economy can’t provide jobs for people who are able and willing to work. This includes both:

general (unskilled) work, and
jobs that require specific skills.

Unemployment is another key indicator of economic health, as it shows how well an economy is creating jobs for its population.

Example:

In South Africa, unemployed individuals who qualify for benefits may receive income through government grants. In the 2022–2023 financial year, according to Statistics South Africa, the government spent over 1.12 trillion rand, which is approximately $$63, 454, 294, 400$ USD.

Unemployment is never good for an economy due to the following effects:

It affects the demand of goods and services
It leads to social effects e.g. crime, violence, vandalism, riots and more
It’s costly for the government because they will have to spend more to support the unemployed

Economic growth

Economic growth is a broad topic that includes many factors. A useful starting point is to look at trade cycles.

Trade cycles

Definitions

Trade cycle: A trade cycle describes the long-term movement of an economy over time.

The trend graph above shows that the economy is neither increasing nor decreasing, so the trend is flat. You can see this because the trend line lies $18 0^{\circ}$ horizontally.

There are 5 stages in the fluctuation process:

Trough
Recession
Expansion
Recovery
Peak

Trend

Definitions

Trend: A trend isn’t a stage of the cycle. It’s the general direction the economy is moving in.

A trend line can also look like this:

The representation of phases of a business cycle graph (above) shows a trend line that slopes gently upward, which indicates that the economy is growing.

Trade cycle stages

Keep in mind the 5 stages of a trade cycle we mentioned. They happen around the trend line, with some stages above it and some below it, as shown in the graphs.

Definitions

Trough: This is the lowest point in the cycle. When the economy reaches this point, it has hit rock-bottom, meaning the next movement is typically upward.
Recession: This is the opposite of expansion. The economy experiences deflationary pressures and this normally happens after the boom period. It is caused by a decrease in demand, which then causes a decrease in inflation.
Expansion: After momentum builds, the economy grows more strongly. Business confidence starts to return, demand rises, and inflationary pressures may increase because demand is high. The government may need to implement measures to reduce that.
Recovery: This is the stage where the economy starts moving away from the trough. Output begins to rise and the economy starts building momentum.
Peak: This is the stage where the economy grows at an exponential rate, which can be damaging in the long term. High demand (because consumers can afford more) creates even more inflationary pressure as suppliers race to meet demand. This stage is also referred to as the boom, meaning after this point the economy will start to move into recession.

Inflation

Price increase without matching value increase
Reduces business confidence and consumer buying power
Lowers demand for goods/services, makes exports expensive

Unemployment

Occurs when willing workers can’t find jobs (skilled or unskilled)
Lowers demand for goods/services, increases government spending
Leads to negative social effects (crime, violence, riots)

Economic growth

Measured by long-term movement (trend) of the economy
Growth rarely follows a straight line; fluctuates over time

Trade cycles

Five stages: Recession, Trough, Recovery, Expansion, Peak (Boom)
Stages occur above/below the trend line

Trend

General direction of the economy (upward, downward, flat)
Trend line shows overall economic movement, not specific stages

Stages of the trade cycle

Trough: lowest point, signals upward movement ahead
Recovery: output rises, momentum builds
Expansion: strong growth, rising demand, possible inflation
Boom/Peak: rapid growth, high demand, high inflation risk
Recession: falling demand, deflationary pressures, follows boom

Next | 3.3 Circular flow model

Economic growth

Inflation

Definitions

Inflation: An increase in the prices of goods and services without a matching increase in their value.

Inflation is one of the key measures of how an economy is performing, as it affects both businesses and consumers.

To understand this more clearly, it helps to compare inflation with situations where prices increase for valid reasons.

Example:

If you buy a laptop for $$400$ with $500 GB$ of storage, upgrade it to $700 GB$ , and then sell it for $$500$ , that price increase isn’t inflation. The product is more valuable because it has better features. But if the same laptop (with no upgrades or improvements) costs $$400$ this year and $$500$ next year, that price increase is inflation.

Inflation is never good for an economy due to the following effects:

It reduces the business confidence in an economy
It reduces the buying power of the consumers
Reduces the demand of goods and services
It makes exports expensive

Unemployment

Definitions

Unemployment: When an economy can’t provide jobs for people who are able and willing to work. This includes both:

general (unskilled) work, and
jobs that require specific skills.

Unemployment is another key indicator of economic health, as it shows how well an economy is creating jobs for its population.

Example:

In South Africa, unemployed individuals who qualify for benefits may receive income through government grants. In the 2022–2023 financial year, according to Statistics South Africa, the government spent over 1.12 trillion rand, which is approximately $$63, 454, 294, 400$ USD.

Unemployment is never good for an economy due to the following effects:

It affects the demand of goods and services
It leads to social effects e.g. crime, violence, vandalism, riots and more
It’s costly for the government because they will have to spend more to support the unemployed

Economic growth

Economic growth is a broad topic that includes many factors. A useful starting point is to look at trade cycles.

Trade cycles

Definitions

Trade cycle: A trade cycle describes the long-term movement of an economy over time.

The trend graph above shows that the economy is neither increasing nor decreasing, so the trend is flat. You can see this because the trend line lies $18 0^{\circ}$ horizontally.

There are 5 stages in the fluctuation process:

Trough
Recession
Expansion
Recovery
Peak

Trend

Definitions

Trend: A trend isn’t a stage of the cycle. It’s the general direction the economy is moving in.

A trend line can also look like this:

The representation of phases of a business cycle graph (above) shows a trend line that slopes gently upward, which indicates that the economy is growing.

Trade cycle stages

Keep in mind the 5 stages of a trade cycle we mentioned. They happen around the trend line, with some stages above it and some below it, as shown in the graphs.

Definitions

Trough: This is the lowest point in the cycle. When the economy reaches this point, it has hit rock-bottom, meaning the next movement is typically upward.
Recession: This is the opposite of expansion. The economy experiences deflationary pressures and this normally happens after the boom period. It is caused by a decrease in demand, which then causes a decrease in inflation.
Expansion: After momentum builds, the economy grows more strongly. Business confidence starts to return, demand rises, and inflationary pressures may increase because demand is high. The government may need to implement measures to reduce that.
Recovery: This is the stage where the economy starts moving away from the trough. Output begins to rise and the economy starts building momentum.
Peak: This is the stage where the economy grows at an exponential rate, which can be damaging in the long term. High demand (because consumers can afford more) creates even more inflationary pressure as suppliers race to meet demand. This stage is also referred to as the boom, meaning after this point the economy will start to move into recession.