A guide to what economic terms mean
29th Oct 2018
Inflation is the change in how much things cost over time. In general, the price of things tends to go up - for example, a pint of milk cost 13p in 1978, but costs 44p today.
This means that when you look at how much the government is spending, or how much people are paid, you need to take inflation into account - because what really matters is how much you can buy with a given amount of money.
There are a few different ways of calculating inflation (depending on whether you’re looking at what households, the government or public bodies are spending money on). Measuring what households are spending involves tracking how the prices of a “basket” of typical goods and services changes over time.
The main inflation rate in the UK was 2.2% in September 2018, meaning that prices (on average) have gone up by that amount in a year.
Sometimes prices fall instead of rising - this is known as deflation.
If the rate of inflation falls from 2% to 1%, that isn't deflation, because prices are still going up—just more slowly. It’s only if the inflation rate falls below zero that it’s deflation.
If an amount of money is described in “real terms”, that means it takes inflation into account.
So if inflation is 2%, but your pay goes up by 3%, that’s called a “real terms” pay rise. But if your pay only goes up by 1% while inflation is 2%, that’s a real terms pay cut - because even though the figure you’re paid is has risen, you’re able to buy less with it.
GDP (or Gross Domestic Product) is the total value of everything that happens within a country’s economy - the goods and service made and the money earned. It’s the main way economists measure how well the economy is doing.
There are several different ways of measuring it. It’s usually measured in three month blocks (quarters).
The first figure produced after the end of each quarter is just an estimate - this gets revised later on when more accurate figures come in.
GDP is usually expected to go up over time. When economists talk about economic growth, this is usually what they mean - the increase in GDP.
GDP doesn’t always go up, though - it can fall when the economy is doing badly. In the UK, a recession is usually defined as when GDP falls for two quarters in a row. The last time this happened in the UK was from 2008 up to the middle of 2009.
The deficit is how much more the government spends in a year than it takes in, through taxes and other income.
There are a couple of different ways of measuring it (depending on whether you count spending and income from things like roads and buildings). When you hear a politician talking about the deficit, it’s important to know which kind they’re talking about.
It’s common for the government budget to have a deficit - in the 73 years since the Second World War, there have only been 13 years when the UK government budget didn’t have a deficit.
The deficit usually goes up during a recession, because the government makes less from taxes and public spending often goes up.
When the government spends more than it takes in, the difference is made up by borrowing.
This kind of borrowing isn’t quite like when you take out a loan from a bank - for one thing, a government like the UK’s can print its own money to pay the borrowing back (it’s quite a bit more complicated than that, but that’s the basic idea).
The debt is the total amount of money the government owes from its borrowing over the years. It’s not the same as the yearly deficit (the difference between government spending and income), and reducing the deficit isn’t the same as reducing the national debt.
The most common way of talking about debt is as a percentage of the country’s GDP. The UK’s debt is currently £1.8 trillion, or 84% of GDP.
Again, it’s not necessarily a bad thing that a government has debt - almost all countries do. There is a debate among economists about whether there is a level of debt that is too high.