AQA A Level Economics 3.2.1 The Measurement of Macroeconomic Performance Exam Questions

About AQA A Level Economics 3.2.1 The Measurement of Macroeconomic Performance

The measurement of macroeconomic performance is section 3.2.1 of AQA A Level Economics and opens the macroeconomics content examined on Paper 2. It covers the objectives of government economic policy: economic growth, low unemployment, low and stable inflation, a satisfactory balance of payments position, balancing the government budget and a more even distribution of income. It explains the main indicators used to judge performance, including real GDP, CPI and RPI inflation, unemployment measured by the Labour Force Survey and the claimant count, and the current account. It also covers index numbers, real versus nominal values and the uses and limitations of national income data for comparisons of living standards.

What you need to know

• Policy objectives The main objectives are economic growth, low unemployment, low and stable inflation (the UK target is 2 percent CPI) and a satisfactory balance of payments on current account. Other objectives include balancing the budget, protecting the environment and greater equality of income.
• Index numbers An index number shows change relative to a base year set at 100. Index = (value in given year / value in base year) x 100. Weighted indices reflect the relative importance of items, as in the CPI.
• Real and nominal values Nominal values are in current prices; real values are adjusted for inflation. Real GDP is used to measure economic growth, because nominal GDP can rise just because prices rise.
• Measuring inflation and unemployment The CPI measures changes in the price of a basket of goods bought by a typical household. Unemployment is measured by the Labour Force Survey (ILO definition) and by the claimant count, which tends to be lower.
• National income data GDP measures the value of output produced within a country. GDP per capita and purchasing power parity (PPP) adjustments are used to compare living standards between countries and over time.
• Limitations of GDP GDP ignores the hidden economy, unpaid work, the distribution of income, leisure, quality of goods and environmental costs. Wider measures include the Human Development Index and measures of national wellbeing.

Common mistakes in 3.2.1 The Measurement of Macroeconomic Performance

• Using nominal GDP growth as economic growth. Economic growth is measured by the change in real GDP.
• Saying a fall in the inflation rate means prices are falling. Prices are still rising, just more slowly; falling prices is deflation.
• Reading an index number as a percentage change directly when the base is not the starting year. Calculate percentage change as (new - old) / old x 100.
• Assuming higher GDP per capita always means higher living standards. Consider inequality, hours worked, environmental quality and PPP.
• Confusing the claimant count with the Labour Force Survey. The LFS uses the ILO definition and includes people actively seeking work who are not claiming benefits.

Try three 3.2.1 The Measurement of Macroeconomic Performance exam-style questions