AQA A-Level Economics · Revision notes

4.2.1.2 Macroeconomic Indicators

To judge how well an economy is performing, economists use a small set of headline indicators. This topic covers the main ones: real GDP and real GDP per capita, the CPI and RPI measures of inflation, the measures of unemployment, productivity and the balance of payments on current account. The detail matters: several of the terms below are easy to confuse and describe genuinely different things.

Real GDP and the growth rate

GDP is the total value of goods and services produced in an economy over a period of time. The growth rate is the percentage change in real GDP from one period to the next.

Key idea: The word real is doing essential work. Nominal GDP can rise simply because prices rose, without a single extra good being produced. Real GDP strips inflation out, so a rise means the economy genuinely produced more.

Three distinctions to hold apart:

• Real versus nominal. Real is adjusted for inflation; nominal is measured at the prices of the day.
• Total versus per capita. Total GDP is the whole economy's output. GDP per capita divides that by the population, and it is the better guide to the average person's material standard of living. An economy can grow 2% while GDP per capita falls, if the population grows faster.
• Value versus volume. Value is output measured in money; volume is output measured in quantity. The same volume of cars sold at higher prices raises value but not volume.

Worked example: calculating a growth rate

An economy has nominal GDP of £2,600bn in 2024. The GDP deflator is 100 in 2023 and 103 in 2024. Real GDP in 2023 was £2,480bn. The population grew by 0.8%.

Step 1 — convert nominal to real. Real GDP 2024 = 2,600 ÷ (103 ÷ 100) = £2,524bn

Step 2 — calculate the real growth rate. (2,524 − 2,480) ÷ 2,480 × 100 = 1.8%

Step 3 — adjust for population. Growth in GDP per capita ≈ 1.8% − 0.8% = 1.0%

Two errors account for most wrong answers: dividing by the later year's figure instead of the earlier one, and forgetting to multiply by 100.

The Consumer Prices Index (CPI)

Inflation is a sustained rise in the general price level. In the UK, the Bank of England is given an explicit numerical target for it: 2% a year, measured by the Consumer Prices Index.

The CPI tracks the cost of a representative basket of goods and services bought by UK households.

1. Build the basket. The Office for National Statistics chooses several hundred items that represent typical household spending, from bread and rent to streaming subscriptions. The basket is reviewed every year so that it keeps up with what people actually buy.
2. Weight the items. Each item is weighted by its share of household spending, using data from a household spending survey. A 10% rise in the price of something households spend a lot on moves the index far more than the same rise in something they rarely buy.
3. Collect prices. Prices are collected every month from shops and online sources across the country.
4. Calculate the index. Weighted price changes are combined into a single index number relative to a base year, where the index equals 100.
5. Calculate the rate. The inflation rate is the percentage change in the index over twelve months.

Rate of inflation = (index this year − index last year) / index last year × 100

If the CPI rises from 125.0 to 128.5, inflation is (128.5 − 125.0) / 125.0 × 100 = 2.8%.

The RPI as an alternative measure

The Retail Prices Index is an older measure that is still published.

• It includes housing costs such as mortgage interest payments and council tax.
• It uses a different averaging formula, which tends to give a higher figure than the CPI even for the same price changes.
• It is no longer a national statistic and is not used for the inflation target, though it is still used in some contracts and index-linked bonds.

The RPI usually exceeds the CPI. The gap widens when interest rates rise, because mortgage interest payments feed directly into it.

Measures of unemployment

The claimant count is the number of people claiming unemployment-related benefits, now mainly Universal Credit claimants who are required to look for work.

• It is cheap and quick to produce, because it comes from administrative records.
• It misses people who are unemployed but not eligible for benefits, or who choose not to claim.
• It changes when benefit rules change, even if the labour market has not.

The International Labour Organisation (ILO) measure uses the UK Labour Force Survey, a regular survey of households. Someone is counted as unemployed if they are:

• without a job,
• have actively looked for work in the past four weeks, and
• are available to start work in the next two weeks.

Key distinction: The ILO measure is internationally comparable and captures people the claimant count misses, so it is usually the higher figure. It includes people who are looking for work but do not claim benefits, for example because they have savings or a partner in work, because they are not eligible, or because they choose not to claim.

Because it is a survey, it is subject to sampling error, and response rates to the survey have fallen in recent years.

The economically active population, or labour force, is the employed plus the unemployed.

Unemployment rate = number unemployed / economically active population × 100

Productivity

Productivity measures output per unit of input, most often output per worker or output per hour worked. Rising productivity lets an economy produce more from the same resources, so it is the main source of sustained increases in living standards. It also affects international competitiveness, because higher output per worker lowers the labour cost of each unit produced.

The balance of payments on current account

The balance of payments is the record of all financial transactions between one country and the rest of the world over a period of time. For the macroeconomic objectives, the part that matters most is the current account, which records trade and income flows.

The current account records:

• Trade in goods: exports and imports of physical products, such as cars, machinery, food and fuel.

• Trade in services: exports and imports of services, such as financial services, tourism, insurance and education.

• Primary income: income flowing into and out of the country from ownership of assets abroad and work abroad, such as profits, interest and dividends on investments, and wages.

• Secondary income: transfers where nothing is given in return, such as foreign aid, payments to international organisations, and money migrants send home.

• A current account deficit means more money flows out of the country on the current account than flows in. The country is spending more abroad than it earns.

• A current account surplus means more flows in than out.

The current account balance is usually expressed as a percentage of GDP, which allows comparison over time and between countries.

Key terms

Common mistakes

• Confusing slower growth with a shrinking economy. If growth falls from 3% to 1%, the economy is still growing, just more slowly. Output only falls when growth is negative.
• Comparing nominal figures over time, or market-exchange-rate figures across countries.
• Calculating inflation from index points. A rise from 125 to 130 is 5 points, but inflation is 4%. Always divide by the earlier value.
• Dividing by the whole population. The unemployment rate divides by the economically active, not by everyone of working age.
• Assuming the two measures should match. The ILO measure is usually higher, for reasons that can be explained.
• Treating the balance of trade as the whole current account. Primary and secondary income are also included.

How this has been examined

In the AQA papers indexed on this site, this topic has appeared in three formats:

• 4-mark "Explain" data response — asked twice across 2 series (2023 to 2024)
• 2-mark calculation — asked once (2023)
• 1-mark multiple choice — asked 4 times across 4 series (2017 to 2025)

Where this goes next

The objectives these indicators measure are set out in 4.2.1.1 The objectives of government economic policy. How index numbers such as the CPI are built and used is covered in 4.2.1.3 Uses of index numbers, and the use of national income data to compare living standards in 4.2.1.4 Uses of national income data. Each indicator is examined in more depth in 4.2.3.1 Economic growth and the economic cycle, 4.2.3.2 Employment and unemployment, 4.2.3.3 Inflation and deflation and 4.2.6.3 The balance of payments.