Measuring economic performance
50 marks: 12 multiple choice questions, a data response and an essay. Answers are at the end.
AQA: Question 14 would be a 25-mark question on your papers.
Edexcel: Question 14 would be a 25-mark question on your papers.
OCR: Question 14 would be a 25-mark question on your papers.
Multiple choice online
The test
1Nominal GDP rises by 7% in a year in which the price level rises by 4%. Real GDP has risen by approximately:
- A 3%
- B 1.75%
- C 4%
- D 11%
2A country's real GDP grows by 2% while its population grows by 3%. It can be concluded that:
- A inflation has risen
- B real GDP per head has fallen
- C living standards have risen for the average resident
- D the economy is in recession
3GDP per head converted at purchasing power parity rather than market exchange rates gives a better comparison of living standards because it:
- A adjusts for the distribution of income
- B includes the value of unpaid work in the home and the informal economy
- C allows for differences in the prices of goods between countries
- D excludes government spending
4Which one of the following is a limitation of using GDP to compare living standards over time?
- A it includes transfer payments
- B it cannot be calculated for service industries
- C it is measured in current prices only, so inflation is not removed
- D it ignores the value of leisure, the environment and unpaid work
5The consumer prices index rises from 125.0 to 130.0 over a year. The rate of inflation is:
- A 4.0%
- B 0.5%
- C 3.8%
- D 5.0%
6The rate of inflation falls from 6% to 2%. This means that:
- A real incomes must have fallen
- B prices are falling
- C prices are still rising, but more slowly
- D the price level is back to where it was before
7Which one of the following is most likely to cause cost-push inflation?
- A a cut in income tax
- B a rise in the price of imported raw materials
- C a rise in consumer confidence
- D an increase in government spending on infrastructure
8Which group is most likely to gain from a period of unexpectedly high inflation?
- A pensioners on fixed incomes
- B workers on fixed wage contracts
- C savers holding cash
- D borrowers with fixed-rate loans
9A country has a working-age population of 40 million, of whom 32 million are employed, 2 million are unemployed and actively seeking work, and 6 million are economically inactive. The unemployment rate is:
- A 20%
- B 5.0%
- C 5.9%
- D 6.25%
10A person who has lost their job in a coal mine and lacks the skills demanded by growing industries in the area is best described as:
- A structurally unemployed
- B frictionally unemployed
- C seasonally unemployed
- D cyclically unemployed
11Which one of the following would be counted as unemployed on the ILO (Labour Force Survey) measure but not on the claimant count?
- A a person claiming Universal Credit who is too ill to work
- B a student in full-time education
- C a part-time worker who wants more hours but cannot find a full-time job
- D a graduate looking for work who is not eligible for benefits
12Which one of the following is recorded as a credit in the current account of the UK balance of payments?
- A a UK tourist's hotel bill in Spain
- B fees earned by a London law firm from an American client
- C a UK pension fund buying shares in a German company listed in Frankfurt
- D a Japanese firm building a factory in Sunderland
13The UK economy recovered its pre-pandemic size in 2022 but has grown slowly since, while prices rose faster than at any time since the early 1980s. Unemployment stayed low by historical standards, though the number of people out of the labour force because of long-term sickness rose to a record. Table 1 shows figures for the UK; the GDP and index figures are rounded, the 2025 figures are forecasts.
| 2022 | 2023 | 2024 | 2025 (forecast) | |
|---|---|---|---|---|
| Real GDP (£bn, 2022 prices) | 2,500 | 2,510 | 2,538 | 2,566 |
| Consumer prices index (2015 = 100) | 121.7 | 130.5 | 133.8 | 138.2 |
| Unemployment rate (%) | 3.7 | 4.0 | 4.3 | 4.8 |
| Population (million) | 67.6 | 68.3 | 69.0 | 69.5 |
(a)Using Table 1, calculate the rate of real GDP growth in 2024 and the rate of inflation in 2023. [2]
(b)Using Table 1, explain whether the average UK resident was better off in 2024 than in 2022. [4]
(c)With the aid of a diagram, explain how the inflation of 2022 and 2023 differed from demand-pull inflation, and why it was expected to be temporary. [6]
(d)Explain two reasons why a low unemployment rate may give a misleading picture of the state of the UK labour market. [6]
14Evaluate the view that economic growth is the most important macroeconomic objective for the UK government. [20]
Answers
Show the answers
AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation.
| Answer | Why | |
|---|---|---|
| 1 | A | Real growth is roughly nominal growth minus inflation: 7% − 4% = 3%. |
| 2 | B | Output per person falls when population grows faster than output; a recession needs falling real GDP. |
| 3 | C | PPP exchange rates equalise the cost of a basket of goods, so the figure reflects what income can actually buy in each country. |
| 4 | D | GDP counts market output; longer working hours or pollution clean-up raise GDP without raising wellbeing. |
| 5 | A | (130 − 125) ÷ 125 = 0.04, so 4.0%; 5.0 is the change in index points, not the percentage. |
| 6 | C | Disinflation is a slower rate of increase; deflation would require a negative rate. |
| 7 | B | Higher input costs shift SRAS left; the other three raise aggregate demand. |
| 8 | D | Inflation erodes the real value of a fixed debt, so the borrower repays in money that buys less. |
| 9 | C | The rate is unemployed ÷ labour force (employed + unemployed) = 2 ÷ 34 = 5.9%; dividing by the whole working-age population gives 5%. |
| 10 | A | A mismatch between workers' skills or location and the jobs available after a change in the structure of the economy. |
| 11 | D | The ILO measure counts anyone without a job who is seeking and available for work, whether or not they claim benefits. |
| 12 | B | Exports of services bring money in; the investment flows belong in the financial account, and the hotel bill is an import of services. |
13 (a) Using Table 1, calculate the rate of real GDP growth in 2024 and the rate of inflation in 2023. [2: AO2 2]
- AO2 (1) Growth 2024 = (2,538 − 2,510) ÷ 2,510 = 1.1%
- AO2 (1) Inflation 2023 = (130.5 − 121.7) ÷ 121.7 = 7.2%
13 (b) Using Table 1, explain whether the average UK resident was better off in 2024 than in 2022. [4: AO2 2, AO3 2]
- AO2 (1) Real GDP per head: 2022 = 2,500 ÷ 67.6 = £36,980; 2024 = 2,538 ÷ 69.0 = £36,780, a fall of about 0.5% even though total real GDP rose 1.5%
- AO3 (1) Population grew faster than output, so the average person's share of output fell: growth in total GDP overstates the change in living standards
- AO3 (1) Real GDP per head is itself an average: the distribution matters (those on fixed incomes lost more to 10% inflation), and it ignores unpaid work, leisure, health and the environment
- AO2 (1) Application: with unemployment rising from 3.7% to 4.3% and long-term sickness at a record, some groups were clearly worse off, while others with pay rises above inflation were better off; the figures do not support a general improvement
13 (c) With the aid of a diagram, explain how the inflation of 2022 and 2023 differed from demand-pull inflation, and why it was expected to be temporary. [6: AO1 2, AO2 1, AO3 3]
- AO1 (2) Diagram: two AD/AS panels or one diagram showing both shifts: demand-pull as AD shifting right along SRAS (price level and output both rise); cost-push as SRAS shifting left (price level rises, output falls)
- AO3 (1) The 2022 rise was driven by import prices: gas, oil, food and shipping costs rose after the invasion of Ukraine and the pandemic, raising firms' costs at every level of output, so SRAS shifted left: cost-push
- AO3 (1) Demand-pull inflation comes from spending growing faster than capacity (low interest rates, fiscal stimulus, pent-up savings after lockdown also played a part in 2021 and 2022), which raises output and employment as well as prices
- AO3 (1) A cost shock raises the price level once: when energy prices stop rising or fall back, the inflation rate falls even if the price level stays high, so it was expected to be temporary unless it fed into wages and expectations (a wage-price spiral), which is what the Bank of England raised interest rates to prevent
- AO2 (1) Application: inflation fell from 11.1% in late 2022 to around 2% by mid-2024 as gas prices fell, while output barely grew, which fits a cost-push shock rather than excess demand
Levels: 1 to 2 for a description with a partly correct diagram; 3 to 4 for a correct diagram distinguishing the two causes; 5 to 6 for the temporary nature explained and applied to the UK figures.
13 (d) Explain two reasons why a low unemployment rate may give a misleading picture of the state of the UK labour market. [6: AO1 2, AO2 2, AO3 2]
- AO1+AO2+AO3 (3) Economic inactivity: people not working and not seeking work (long-term sick, early retired, students, carers) are not counted as unemployed, so a rise in inactivity lowers the labour force and can keep the unemployment rate low while fewer people are in work; long-term sickness reached a record 2.8 million in 2024
- AO1+AO2+AO3 (3) Underemployment and job quality: part-time and gig workers who want more hours, and graduates in jobs below their skill level, count as employed, so the rate ignores the quantity and quality of work; real wages fell for two years despite low unemployment
- AO1+AO2+AO3 (3) Or: regional and group differences hidden in the national average (youth unemployment several times the overall rate); measurement problems with the Labour Force Survey's falling response rates, which led the ONS to suspend some figures in 2023
Maximum 6: two reasons, each explained and applied to the UK.
14 Evaluate the view that economic growth is the most important macroeconomic objective for the UK government. [20: AO1 6, AO3 6, AO4 8]
Knowledge and analysis (AO1 to AO3)
- Define economic growth (a rise in real GDP, or in the long run in potential output, shown by an outward shift of LRAS or the PPF) and the other objectives: low and stable inflation (the 2% target), low unemployment, a sustainable balance of payments, and increasingly sustainable public debt, a fair distribution of income and the environment.
- The case for growth: it raises real incomes and living standards and generates the tax revenue that funds health, education and pensions without higher rates; it makes the other objectives easier, since growing economies have lower unemployment and falling debt ratios; the UK's weak productivity growth since 2008 underlies stagnant real wages and strained public services. Diagram: LRAS shifting right allows higher output at a stable price level.
- The case for inflation as the priority: inflation redistributes arbitrarily, erodes savings and competitiveness and deters investment; the Bank of England's mandate puts price stability first; 2022 and 2023 showed how quickly high inflation dominates real incomes and politics.
- The case for employment: unemployment has large personal and social costs (lost income, health, skills decay) and wastes resources.
- Sustainability and distribution: growth that depletes natural capital or whose gains go to a few does little for most households; GDP ignores both.
- Conflicts: fast demand-led growth can raise inflation and the current account deficit; supply-side growth avoids this but is slow and uncertain, so governments trade off objectives over the cycle.
Evaluation (AO4)
- It depends on the time horizon: in the long run growth in productive capacity is the foundation for every other objective; in the short run, when inflation is 10% or unemployment is rising fast, those take priority.
- It depends on the type of growth: sustainable, broadly shared, productivity-led growth deserves top priority; growth from a credit boom or environmental depletion does not.
- It depends on the starting point: with inflation near target and a stable labour market, raising trend growth is the binding problem, which the UK's productivity record since 2008 suggests is the current case.
- The objectives are complementary more than competing: stable inflation and low unemployment are conditions for investment and growth, so ranking them is partly a false choice; the question is which to act on first when they conflict.
Judgement
A supported judgement might conclude that sustainable growth in productive capacity is the most important objective over the long run, because it funds and eases the others, but that it cannot be pursued regardless: price stability and high employment are both conditions for growth and objectives in their own right, so in the short run the priority shifts to whichever is furthest from target, as it did to inflation in 2022.
Marking
Bands, out of 20 (AO1 knowledge 6, AO3 analysis 6, AO4 evaluation 8, as WJEC marks a 20-mark question). Top band (16 to 20): a range of points developed in full chains of reasoning, supported by an accurate diagram and real examples, with evaluation that weighs the arguments and reaches a judgement that depends on stated conditions. Middle band (9 to 15): some developed chains, a relevant diagram, evaluation present but one-sided or asserted. Bottom band (1 to 8): points listed or described, little use of theory or examples, judgement missing or unsupported.