Inflation and the Trade Cycle

Defining deflation as 'prices of goods falling' or inflation as 'petrol getting dearer' describes one market, not the economy. The macro definition needs two parts: (1) a sustained change (2) in the general/average price level. Examples alone earn zero — examiners want both parts present.

A 6-mark Analyse or Explain question rewards one developed chain, not a balanced argument. The mark scheme carries no AO4 (assessment objective 4), so counter-arguments and caveats earn nothing. Define the term, apply it to the data, and develop the chain fully. Save evaluation for 12-mark Assess and Evaluate questions.

A frequent slip: claiming unemployment falls in a recession, or inflation rises in a slump. In a boom: GDP above trend, unemployment falling, demand-pull inflation. In a recession: unemployment rising, inflation easing. In a slump: unemployment highest, deflation possible. Boom and recession mirror each other across every indicator — use that as a check.

A recession is negative real GDP growth — output actually falling — for two or more consecutive quarters. Still growing but more slowly (3% down to 1%) is a slowdown, not a recession. Writing 'growth fell, so it is a recession' loses the application mark: growth must turn negative, not just rise more slowly.

Unlike demand-pull, cost-push inflation shifts AS (aggregate supply) left, so the price level rises while output falls — the stagflation risk (rising prices with rising unemployment). Not every kind of inflation means a booming economy. If a question links inflation to rising costs (oil, wages), expect prices up and output down.

Treating all inflation as damaging costs application marks. A low, stable rate — around 2% a year — is generally healthy: money loses value slowly, so households spend rather than hoard. The costs come from high or volatile inflation and from deflation. The issue is the rate and its stability, not inflation itself.