What we now know about the UK economy in four charts
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Supply shocks, Cost-push inflation, Economic growth and the business cycle
What happened
The UK's Office for Budget Responsibility says higher energy prices will affect everything from prices and living standards to economic growth.
The economics
Energy is a key input into many production processes, so higher energy prices raise firms' costs, which may be passed on as higher prices, producing cost-push inflation; at the same time real incomes are squeezed and consumption and investment weaken, slowing growth, showing how a supply shock hits both inflation and output.
Evaluation
However, the eventual effect on inflation and growth depends on how long the shock lasts and how monetary and fiscal policy respond, so short-run and long-run outcomes differ, and the burden falls unevenly on different households and industries.
Practice question
Using this example, explain how higher energy prices act as a supply shock affecting both a country's inflation rate and its economic growth, and evaluate possible government policy responses.
Read the article ↗ · Draw the diagram in the Diagram Lab
Where it fits in the syllabus
- Supply shocks: A sudden change in supply, such as energy, food or supply-chain disruption, that moves prices and output.
- Cost-push inflation: Higher costs of production such as wages, energy or materials lead firms to raise prices.
- Economic growth and the business cycle: Long-run growth in real GDP and the short-run swings between expansion and recession, when output falls below potential.
- IB Economics: Demand, Supply and Elasticity, Aggregate Demand and Supply, Measuring Economic Activity
- A-Level Economics: Supply and Demand, Aggregate Demand and Supply, Macroeconomic Objectives
- AP Macroeconomics: National Income and Price Determination, Economic Indicators and Business Cycle
- AP Microeconomics: Supply, Demand and Market Equilibrium
- IGCSE Economics: Demand and Supply, Macroeconomic Objectives