Measures of Economic Performance
Measures of Economic Performance
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One figure adds up everything a country produces. Economic growth is about how fast that figure changes, not how big it is.
Think of everything produced in a country in a year: rice harvested, phones assembled, haircuts given. Add up what it is all worth and you have one number for the economy's output: gross domestic product, or GDP.
Gross domestic product (GDP): the total value of all the goods and services produced within a country's borders over a given period, usually a year.
Within a country's borders means output counts where it is made, whoever owns the firm: a Japanese-owned car plant in Thailand adds to Thailand's GDP. Over a given period makes GDP a flow, like a monthly wage, not a stock like savings.
GDP shows how big an economy is. Economic growth is about change: how much more it produces than the year before.
Economic growth: an increase in the real output of an economy over time, measured by the rate of change of real GDP.
Real means measured at constant prices, so a rise shows that more was produced, not only that prices went up.
More output means more income to spend on food, housing, schooling and healthcare. So the rate of change of real GDP is also used as a measure of living standards: a rough one, because it counts output, not how it is shared or how people live.
Real Example: Oil began to flow off Guyana's coast in December 2019, pumped by foreign companies led by ExxonMobil. It is produced in Guyana's waters, so it counts in Guyana's GDP. In 2022 Guyana's real GDP grew by about 63% and Egypt's by about 7%, yet Egypt's economy, about $480 billion, was still about 30 times the size of Guyana's.
Exam Matters: Asked to define GDP, put three things in one sentence: the value of goods and services, produced within the country's borders, over a period such as a year. For economic growth, write 'the rate of change of real GDP', keeping the word 'real'.
Not all the income from a country's output belongs to the people who live there. GNI follows the income to its owners.
Picture a factory in your town owned by a firm abroad. Its output counts in your country's GDP, because it is made there, but its profits go to the owners abroad. They are not income for anyone who lives in your country.
It works the other way too: a local firm that owns a hotel abroad brings its profits home. To measure the income of a country's residents, the people and firms based there, start from GDP and follow these flows.
Primary income: income earned from taking part in production or from owning assets, such as wages, profits, interest and dividends.
Gross national income (GNI): the total income earned by a country's residents in a given period, wherever in the world it is earned: GDP plus primary income received from abroad, minus primary income paid abroad.
Gifts are not primary income either. Money that relatives living abroad send home, and aid grants from foreign governments, are transfers, so they are not part of GNI.
Real Example: At the end of 2025, 47% of the people employed in Luxembourg lived in France, Belgium or Germany. Their wages count in Luxembourg's GDP, because the work is done there, but they are income paid abroad. That is one reason why Luxembourg's GNI in 2024 was only about two-thirds of its GDP: about $61 billion against $93 billion.
Exam Matters: Name the flow in the question's country, say which way it crosses the border, and what it does to GNI: 'foreign-owned mines send their profits abroad, so GNI is below GDP'.
A GDP figure in money can rise because more was made or because prices rose. Real GDP takes the price rises out, so you can tell which.
A bakery sells 1,000 loaves this year and 1,000 next year, but raises its price from $1.00 to $1.10. Its sales rise by 10%, yet it baked no more bread. GDP has the same problem with inflation, a sustained rise in the general price level, so economists keep two versions of it.
Nominal GDP: GDP measured at current prices, the prices of the year in which the output was produced.
Base year: the year chosen as the reference point for an index or for constant prices, when the index is set at 100.
Price index: a number that shows the average level of prices in a period compared with a base year, when it is 100.
For GDP, the price index covers the prices of everything the economy produces, not only what households buy, and is called the GDP deflator. An index of 104 means those prices are, on average, 4% higher than in the base year.
Real GDP: GDP measured at constant prices, the prices of a chosen base year, so that the effect of inflation is removed.
Both figures are correct: prices rose by more than output fell. Only real GDP shows what happened to output.
Real Example: In 2022 Turkey's GDP measured in lira more than doubled, from about 7.4 trillion to about 15.3 trillion. But its GDP deflator rose by about 96%: the prices of what Turkey produced nearly doubled. At 2021 prices, GDP in 2022 was about 15.3 ÷ 1.96 = 7.8 trillion lira, only about 5% more than in 2021.
Exam Matters: Write the formula, show the division with the figures, and give the unit, such as $ billion. For growth, use the real figures, never the nominal ones.
A bigger economy is not always a richer one. Dividing GDP by the population shows how much output there is for each person.
A family of four earning $4,000 a month has $1,000 for each person. If its income rises to $5,000 but a grandparent moves in, making five, each person still has $1,000. A country works the same way: total output can grow while output per person stays still, or even falls.
GDP per capita: GDP divided by the population of the country, giving the average output, or income, per person.
To compare living standards over time, use real GDP per capita, so that neither price rises nor population growth can flatter the figure.
Year 2 is the trap. Andara's economy grew by 5%, yet the average person was no better off, because the population grew just as fast. Real GDP per capita rises only when real GDP grows faster than the population.
Real Example: Between 2014 and 2024, Nigeria's real GDP grew by about 13%. Over the same years its population grew by about 25%, from about 186 million to about 233 million. So real GDP per person fell by about 10%: the economy grew, but the average Nigerian had less output to share.
Exam Matters: When a table gives GDP and population, work out GDP per capita for each year and show each division. Check the units: billions divided by millions gives thousands. Say 'per capita' in your conclusion, so it is clear you mean the average person.
Earning more from exports does not mean selling more of them. Value and volume can move in opposite directions, so check which one a figure measures.
A farmer sells 10 tonnes of coffee one year and 9 tonnes the next, but the price rises from $4,000 to $5,000 a tonne. She sold less coffee and earned more money: $45,000 instead of $40,000. Both statements are true, because they measure different things.
Volume measure: a measure of the quantity of goods and services produced or sold, such as tonnes, barrels or units, so it is not affected by changes in prices.
Value measure: a measure of goods and services in money, found by multiplying the quantity by its price, so it changes when either the quantity or the price changes.
The same idea applies to the whole economy. Nominal GDP is a value measure: output at current prices. Real GDP is a volume measure: output at the fixed prices of a base year, so it changes only when the quantity of goods and services changes.
So when a report says that exports, sales or GDP 'rose', ask whether it means value or volume. A rise in value can come from higher prices alone.
Real Example: Vietnam is one of the world's biggest coffee exporters. In the 2023-24 crop year it exported about 1.46 million tonnes, about 12% less than the year before. But the average export price rose by nearly 50%, so the value of its coffee exports rose by about 33%, to a record $5.43 billion.
Exam Matters: When data show both quantities and money, say what each one measures before you compare them. Use the figures to show the direction and size of each change, then explain the gap between them with the price.
A faster growth rate does not make a country richer. Before you compare two countries, choose the right figure, or the comparison can point the wrong way.
Suppose one country's economy grew by 7% last year and another's by 1%. Whose people live better? You cannot tell yet. A comparison between countries only works when both figures measure the same thing in the same way.
Exchange rate: the price of one currency expressed in terms of another currency.
Growth rates can be compared directly, because a percentage has no currency. Levels, such as GDP per capita, cannot be compared until they are in one currency.
The habit to build is to ask which choice changes the answer. If the country that grows faster is still far poorer per person, both statements are true, and the question tells you which one it wants.
Rates and levels answer different questions. The growth rate tells you whose output is catching up; real GDP per capita tells you where people have more today.
Real Example: In 2025 Indonesia's real GDP grew by about 5.1% and the Netherlands' by about 1.8%. At market exchange rates the two economies were about the same size, about $1.4 trillion and $1.3 trillion. But Indonesia has about 16 times as many people, so its GDP per capita, about $5,100, was less than a fourteenth of the Netherlands', about $73,700.
Exam Matters: When data compare two countries, say what the figures can and cannot show before you draw a conclusion. One sentence such as 'these are totals, so they take no account of population' turns a description into evaluation.
Comparing a country with its own past sounds simple, but both years must be measured the same way, or the change you see may not be real.
Comparing one country across years removes the currency problem. It leaves others, and each can make growth look bigger or smaller than it really was.
Rebasing: recalculating GDP using a newer base year, usually with up-to-date prices, weights and coverage of industries.
A rebasing usually changes two things. The level of GDP rises when industries that were missed are counted, and growth rates can change a little, because each industry is now weighted by newer prices.
The further apart the years, the weaker the comparison. Many goods people buy today did not exist 50 years ago, and others have become far better for the same price. Real GDP captures these changes in quality only roughly, so comparisons over decades need the most care.
Real Example: In November 2010 Ghana's statistics office moved its base year from 1993 to 2006 and used newer data sources. Its estimate of GDP for 2006 rose by about 60%, and the share of services in GDP by about 16 percentage points. Ghana had not produced more: its economy was being measured more fully, so old and new figures could not be compared.
Exam Matters: When data cover many years, check the notes for a change of base year, a revision, or a switch between quarterly and annual figures. Pointing out that two figures cannot be compared, and why, is a strong evaluative point in a data question.
The same dollar buys much more in some countries than in others. Converting incomes at purchasing power parity compares what they can actually buy.
A haircut, a bus ride or a plate of rice costs far less in Dhaka than in Rome. So an income converted into dollars at the market exchange rate can make people in lower-income countries look poorer than they are.
Market exchange rates are set mostly by trade and by money moving between countries. Housing, haircuts and local transport are never traded across borders, and they tend to be cheaper in lower-income countries, which the market rate misses.
Purchasing power parity (PPP): the rate of exchange at which the same basket of goods and services costs the same in two countries, used to compare incomes and output between countries by what they can buy.
PPP figures are estimates. They depend on which basket is priced and how prices are collected, so small differences between countries mean little.
Real Example: In 2025 GDP per capita in Bangladesh was about $2,600 at market exchange rates, and in Italy about $43,300, around 17 times as much. At purchasing power parity the figures were about $10,200 and $62,800, so the gap shrinks to around 6 times. Prices in Bangladesh are much lower, so each taka stretches further than the market rate shows.
Exam Matters: If a question gives GDP per capita at market rates and at PPP, use PPP for living standards and say why: goods and services that are not traded are cheaper in lower-income countries, which pushes their PPP figures up.
Growth that slows is still growth. Only a negative growth rate means the economy produced less than it did before.
Picture a child who grew 6 cm one year and 1 cm the next. The child grew more slowly, but did not shrink. Economies work the same way: a smaller positive growth rate still means more output than the year before.
Negative economic growth: a fall in real GDP from one period to the next, so that the rate of economic growth is below zero.
Selva, an invented economy, shows the difference. Its growth slows from 6% to 3% to 1%, yet its real GDP keeps rising, from 106 to 109.2 to 110.3 (year 0 = 100). Only in year 4, at −2%, does its output fall.
Percentage point: the unit for the difference between two percentages, found by subtracting one from the other.
So when growth falls from 3% to 1%, the growth rate has fallen by 2 percentage points, and output has still risen. Growth slowing means a smaller rise in output. Growth turning negative means output fell.
Real Example: Germany's real GDP grew by 1.9% in 2022. It then shrank by 1.0% in 2023, did not grow at all in 2024 and grew by 0.2% in 2025. So German output rose in 2025, yet it was still smaller than in 2022: two years with no growth or a little did not make up for the fall in 2023.
Exam Matters: In a Calculate question, show the change, divide by the earlier year's figure, multiply by 100 and keep the sign. When you describe data, use 'percentage points' for a change in a growth rate and 'per cent' for a change in output.
A recession is not just a bad year. It has an exact test based on quarters, and one weak quarter is not enough to pass it.
Figures for GDP are published every three months, a quarter of a year. Economists do not wait a whole year to say that output is falling: they look at the quarters.
Recession: two consecutive quarters of negative economic growth, when real GDP falls in two quarters in a row.
Every part of the definition matters. Two quarters: one fall is not enough. Consecutive: the falls must follow each other, with no rise in between. Negative growth: output must fall, not just grow more slowly.
Varda, an invented economy, shows the test at work. In its third quarter output falls by 0.2%, but in the fourth it grows by 0.4%, so that fall is not a recession. From the fifth quarter output falls three times in a row, by 0.5%, 0.8% and 0.3%. Varda is in recession from the fifth quarter, and the fall in the sixth confirms it.
The test is mechanical, which is both its strength and its weakness. Anyone can check it, but a long, slow decline broken by one small rise does not count, while two tiny falls do. First estimates are also revised, so a recession can appear or disappear later.
Real Example: In December 2024 New Zealand's statistics office reported that GDP fell by 1.0% in the July to September quarter. It also revised the April to June quarter from a fall of 0.2% to a fall of 1.1%. Two falls in a row meant New Zealand met the definition of a recession.
Exam Matters: When a table gives quarterly growth, find the first negative quarter and check the one after it. Say in which quarter the recession began and which quarter confirmed it; an annual figure alone cannot show whether there was a recession.
GDP counts what is bought and sold. Much of what makes life good is never sold, and a single average hides how income is shared.
Real GDP per capita is the usual way to compare living standards between countries and over time. It measures output well, but living standards are about how people live.
Between countries, compare living standards at purchasing power parity, not at market exchange rates.
None of this makes GDP useless. It is a measure of output, used as a stand-in for living standards. A strong answer names the limitation that matters most for the countries in the question and says which way it pushes the comparison.
Real Example: India's 2024 Time Use Survey found that about four in five women and girls aged six and over did unpaid housework, spending about 289 minutes a day on it; men who did it spent 88 minutes. None of this counts in India's GDP, although the same work would count if a family paid someone to do it.
Exam Matters: In a 14- or 20-mark answer, do not list every limitation. Choose two or three that fit the countries in the question, take each one back to how people live, and then judge how much they change the conclusion.
Instead of counting output, some measures ask people how their lives are going, or combine health and schooling with income.
Two countries can have the same GDP per capita, yet in one people live ten years longer and feel safe walking home at night. To capture differences like these, governments and economists use measures of wellbeing alongside GDP.
Subjective wellbeing: how satisfied people say they are with their lives, measured by asking them in surveys, often on a scale from 0 to 10.
Measures that ask. The World Happiness Report ranks countries using the Cantril ladder. People imagine a ladder from 0, the worst possible life for them, to 10, the best, and say which step they stand on now.
Human Development Index (HDI): a measure of development that combines life expectancy at birth, years of schooling and GNI per capita at purchasing power parity into one figure between 0 and 1.
Measures that combine. The HDI, published by the United Nations, adds health and education to income. A country that turns its income into longer lives and more schooling scores higher than one with the same income that does not.
Each kind has weaknesses. A survey captures what people feel, which GDP cannot, but answers depend on what people expect and on how people in different cultures use a rating scale. The HDI adds health and education, but the way it weights them is a choice someone made, and it says nothing about freedom or the environment.
Real Example: The World Happiness Report 2026, based on Gallup surveys from 2023 to 2025, ranked Finland first for the ninth year running, with an average of 7.76 out of 10. Costa Rica came fourth, with 7.44. Yet Costa Rica's GDP per capita at PPP, about $33,800 in 2025, was only about half of Finland's, about $65,900.
Exam Matters: When a question asks about wellbeing indicators, name a real one and say what it captures that GDP cannot, such as health, schooling or people's own view of their lives. Then give one weakness, such as answers that differ between cultures, so your point is balanced.
Richer people and richer countries do report more happiness, but each extra dollar adds less, and a rise that everyone shares may add little.
Give $1,000 to a family that cannot afford enough food, and it changes their lives. Give the same $1,000 to a comfortable family, and they hardly notice. Surveys of happiness find the same pattern across whole countries.
At any one moment, higher real income, income adjusted for prices, goes with higher reported life satisfaction, between people and between countries. The rise is steep at low incomes and gentler at high ones: each extra dollar adds less, so the same $5,000 lifts satisfaction a lot at a low income and only a little at a high one.
Easterlin paradox: the finding that, at a point in time, richer people and richer countries report greater happiness, but over time average happiness does not rise in line with growth in real income.
Why might happiness not keep up with income over time? Two reasons are usually given.
This matters for comparing living standards. Real GDP per capita tracks happiness closely where incomes are low and loosely where they are high. So rising GDP per capita is strong evidence of better lives in a poor country, and weaker evidence in a rich one.
Real Example: Between 1990 and 2010, spending per person in China, adjusted for prices, rose about fourfold. Yet a study led by Richard Easterlin found no matching rise in average life satisfaction: it fell and then recovered, with no upward trend. The study linked this to rising unemployment and a weaker safety net; satisfaction fell among the poorest third and rose among the richest third.
Exam Matters: If you sketch the relationship, put real income per person on the horizontal axis and average life satisfaction on the vertical, and draw a curve that rises steeply and then more gently. Use it to argue that GDP per capita is a better guide to wellbeing in low-income countries than in high-income ones.
Inflation, deflation and disinflation describe how prices move across a whole economy, and each one tells you something different.
Think about what your family pays for rice, bus fares and rent. In a year some prices rise and a few fall. Economists want one figure for what happened on average, across everything households buy.
General price level: the average level of prices of the goods and services bought in an economy, measured by a price index.
When that average keeps rising, month after month, the economy has inflation. When it keeps falling, it has deflation. One price jumping after a bad harvest is neither: the change has to be general and sustained.
Inflation: a sustained rise in the general price level.
Deflation: a sustained fall in the general price level.
The third word is the one that causes mistakes. Suppose prices rose 8% last year and 3% this year. Prices are still going up, only more slowly: the rate of inflation has fallen, but the price level has not.
Disinflation: a fall in the rate of inflation, so that prices are still rising, but more slowly than before.
So look at the sign of the rate. Any positive rate, however small, means prices are still rising. Only a negative rate is deflation.
Real Example: Thailand has had all three in a few years. Inflation peaked at 7.9% in August 2022, then fell through 2023: disinflation, with prices still rising but more slowly. By November 2023 prices were 0.4% lower than a year earlier, and in every month from April to November 2025 they were lower than a year before, mainly because electricity and fuel became cheaper: deflation.
Exam Matters: A definition needs the general price level and a direction. For disinflation, give both halves: the rate of inflation falls, and prices are still rising.
A consumer price index follows the cost of a typical basket of goods and services, with each group weighted by how much households spend on it.
Nobody can check every price in a country. So statisticians choose a basket: a sample of what households buy, from rice and rent to bus fares and phone data. They record those prices every month.
Consumer price index (CPI): a weighted index of the prices of a representative basket of goods and services bought by households, used to measure changes in the general price level.
Not every price matters equally: if rice doubles, a family feels it far more than if matches do. So each group gets a weight, from a survey of what households spend.
Weights: numbers showing the relative importance of each group of goods and services in the basket, based on its share of household spending.
A simple average of the four indices, 103.75, would let transport, where prices fell, count as much as food, where they rose most.
Real Example: India's new consumer price index, launched in February 2026, is weighted by a survey of household spending in 2023-24. Food and drinks now carry about 37% of the weight, down from about 46% in the old index, because households spend a smaller share of their income on food.
Exam Matters: In a Calculate question, show each weight × index, the total and the division on separate lines, then say what the result means.
An index shows how high prices are; the rate of inflation shows how fast they rose over the last year, so you compare this year's index with last year's.
An index is a level: how high prices are compared with the base year. The rate of inflation is a speed: how fast they rose over the last twelve months, so you compare this year's index with last year's.
Rate of inflation: the percentage change in the general price level over a period, usually a year.
An index can also come from the cost of the whole basket: cost this year ÷ cost in the base year × 100. If Andara's basket cost $2,000 in 2023 and $2,140 in 2024, its index for 2024 is 107.
The index also turns money into real terms. A wage of $1,070 in 2024 is worth $1,070 ÷ 107 × 100 = $1,000 at 2023 prices. If the wage was $1,000 in 2023, what it buys has not changed.
Real Example: In August 2026 the UK's consumer price index stood at 143.6, with 2015 as its base year of 100. A year earlier it was 139.3. The rate of inflation reported was 3.1%: (143.6 − 139.3) ÷ 139.3 × 100. Reading the index as 43.6% inflation would count eleven years of rises as one.
Exam Matters: Write the formula with the figures in it, then the answer with a % sign. In any year after the first, show which index you divided by.
A consumer price index is an average for a typical household, so it can be right for the country and still wrong for your family.
The CPI answers one question well: how much did the cost of the average household's basket change? Each limitation comes from the gap between that question and the one you actually want answered.
None of this makes the CPI wrong: it measures what it was built to measure. But several limitations push the same way. When people switch to cheaper goods and products improve, the index tends to overstate the rise in the cost of living, while the weights can err either way, depending on whose spending you look at.
Real Example: In June 2024 Nigeria's statistics bureau reported inflation of 34.2%, but food prices were 40.9% higher than a year earlier, so families that spend most of their income on food faced more. In January 2025 it moved to a 2024 base with new weights that gave food less importance, and measured inflation fell from 34.8% to 24.5% in a month.
Exam Matters: In an Examine question, explain one or two limitations using the data given, then weigh them: does each one make the index overstate or understate inflation, and for whom does it matter most?
Producer prices are what firms pay and charge before goods reach the shops, so they often move before consumer prices do.
Follow a shirt backwards from the shop. Before it reached the shelf, a clothing factory bought cloth, and a mill bought cotton and electricity. Each of those sales had a price too, and those prices change before the shirt's does.
Producer price index (PPI): an index of the prices firms pay for their inputs, such as materials and energy, and the prices they receive for their output as it leaves the factory.
A cost reaches a firm before it reaches a shelf. If the clothing factory pays more for cloth today, shirt prices may rise months later, once old stock is sold and new price lists are set. So rising producer prices are an early sign that consumer prices may follow.
Suppose producer prices rise 15% over three quarters while consumer prices rise just 2.5%. Consumer prices can keep climbing after producer prices level off, as the costs work through.
It is an indicator, not a forecast. Firms may absorb a cost to keep customers, or the cost may fall back before it reaches shops. And many consumer prices, such as rents and haircuts, depend little on factory costs.
Real Example: In February 2022 Japan's corporate goods price index, its measure of producer prices, was 9.3% higher than a year earlier, the fastest rise since comparable records began in 1981. Consumer prices were then only 0.9% higher. The costs worked through to the shops: by January 2023 consumer prices were 4.3% higher than a year earlier.
Exam Matters: To explain why the PPI signals future inflation, give a two-step chain: producer prices rise, so firms' costs rise, so the prices they charge consumers are likely to rise later. Then give one reason it may not happen.
When total spending grows faster than firms can raise output, buyers compete for scarce goods and the price level rises.
On a festival day, twice as many customers reach a market stall, but it has the same stock. The seller raises prices and still sells out. Demand-pull inflation is this, across a whole economy.
Aggregate demand (AD): the total planned spending on an economy's goods and services at each price level.
Short-run aggregate supply (SRAS): the total output firms plan to supply at each price level, when the costs of production are fixed.
An AD/AS diagram puts the price level on the vertical axis and real output on the horizontal. The AD curve shows how much output households, firms, the government and buyers abroad plan to buy at each price level, and it slopes down. The SRAS curve shows how much firms plan to produce at each price level, and it slopes up, because higher prices make extra output worth producing while costs are fixed.
Demand-pull inflation: a sustained rise in the general price level caused by aggregate demand growing faster than the economy's ability to increase output.
Demand-pull starts when AD shifts right, from AD₁ to AD₂. The price level rises from P₁ to P₂ and real output rises from Y₁ to Y₂. Prices and output rising together is the sign that demand caused the inflation.
How much goes into prices depends on spare capacity. With idle factories and jobless workers, firms can expand, so output rises a lot and prices a little. Close to full capacity, output cannot rise much, so the extra spending pushes up the price level.
Real Example: In March 2021 the United States approved $1.9 trillion of pandemic support, including $1,400 payments to most people. Real output grew by about 6% in 2021 and consumer prices rose 7.0% in the year to December, the fastest in almost 40 years. San Francisco Fed economists estimated the support added about 3 percentage points to inflation.
Exam Matters: Label the axes ‘Price level’ and ‘Real output’, keep AD₁ beside AD₂, and mark P₁, P₂, Y₁ and Y₂ with dashed lines.
When it costs firms more to make each unit, they supply less at every price level, so prices rise while output falls.
A minibus company's diesel costs double overnight. Each journey now costs more to run, so it raises fares, and some routes stop paying at all. When costs rise like this across a whole economy, the result is cost-push inflation.
Cost-push inflation: a sustained rise in the general price level caused by increases in firms' costs of production, which shift short-run aggregate supply to the left.
On the AD/AS diagram, higher costs shift SRAS left, from SRAS₁ to SRAS₂. Along the unchanged AD curve, the price level rises from P₁ to P₂ and real output falls from Y₁ to Y₂.
Prices up with output down is the sign of cost-push, the opposite of demand-pull's pairing. It is the harder case: the economy gets inflation and lost output at the same time, so jobs go too.
Real Example: In the winter of 1973-74 the world price of oil quadrupled in less than three months, and Japan relied heavily on imported energy. Costs rose across its economy: in 1974 Japan's consumer prices rose by about 23%, while its output fell by about 1%, the first fall since the Second World War.
Exam Matters: Build the chain: costs per unit rise, so SRAS shifts left, so the price level rises and real output falls. If data show prices rising while output falls, name cost-push and quote both figures.
If the amount of money grows much faster than the goods it can buy, and people spend it as readily as before, each unit of money buys less and prices rise.
Imagine an island that grows 100 bags of rice a year, where people have $1,000 to spend on them: about $10 a bag. If the money doubles to $2,000, there are still only 100 bags and people spend their money as often as before, buyers bid the price up towards $20.
Money supply: the total amount of money in an economy available for spending, including notes and coins and bank deposits.
The money supply grows when banks lend more, because each new loan creates a new deposit, or when a central bank creates money, for example to lend to the government.
The key word is excessive. A growing economy needs more money to buy its extra output, so money growing in line with output need not cause inflation. If people spend each unit of money as often as before, prices rise by roughly the gap between the two: money up 10% with output up 3% means inflation of about 7%.
It works through aggregate demand. The new money is spent, so AD shifts right, as in demand-pull inflation, but the extra spending is paid for with newly created money. When money grows extremely fast, the result can be hyperinflation.
Hyperinflation: very high and accelerating inflation, often defined as prices rising by more than 50% a month.
Real Example: In the 2000s Zimbabwe's government paid for its spending, including higher pay for the army and officials, with money printed by its Reserve Bank, while farm and factory output collapsed. Official inflation reached 231 million per cent a year in July 2008. In January 2009 a 100 trillion dollar note appeared, and by April 2009 Zimbabwe had stopped printing its own currency and was using foreign ones.
Exam Matters: For an Explain question, build the chain: the money supply grows faster than output, so spending rises on the same quantity of goods, so the price level rises. Quote any figures given for both growth rates.
When spending across an economy falls, firms cut both prices and output, so falling prices arrive together with lost jobs.
Imagine a town whose biggest factory closes. Families spend less, shops fill with unsold stock, and shopkeepers cut prices to clear it. Across a whole economy, this is deflation caused by falling aggregate demand.
AD can fall for several reasons. Households save more because they fear for their jobs, firms cancel plans for new machines and buildings, the government cuts its spending, or buyers abroad want fewer exports. A crash in house or share prices can start the first two, because people feel poorer.
On the AD/AS diagram, AD shifts left from AD₁ to AD₂. Along the unchanged SRAS curve, the price level falls from P₁ to P₂, and so does real output, from Y₁ to Y₂.
Malign deflation: deflation caused by a fall in aggregate demand, which comes with falling output and rising unemployment.
It can feed on itself. If people expect prices to keep falling, they put off big purchases, which cuts AD again. And debts are fixed in money, so as prices and wages fall they are harder to pay back, and borrowers cut spending further.
Real Example: After the Asian financial crisis of 1997-98, Hong Kong's property bubble burst. Households and firms cut spending, and output fell by about 5% in 1998. Consumer prices then fell for 68 months in a row, from November 1998 to July 2004, and were almost 14% lower by the end of 2002, about half of the fall coming from housing costs. Unemployment reached a record 8.7% in 2003.
Exam Matters: Draw AD shifting left, keep AD₁ on the diagram and show both the price level and real output falling. Then say why this deflation is harmful: lower output means fewer jobs, and falling prices can make people delay spending.
When firms find cheaper ways to produce, they supply more at every price level, so prices can fall while output and jobs grow.
Every year, mobile networks carry more data at a lower cost per gigabyte, so prices fall while people use more than ever. When cost savings like this spread across a whole economy, the general price level can fall while output grows.
On the AD/AS diagram, SRAS shifts right from SRAS₁ to SRAS₂. Along the unchanged AD curve, the price level falls from P₁ to P₂, while real output increases from Y₁ to Y₂.
Benign deflation: deflation caused by an increase in aggregate supply, which comes with rising output and employment.
It is not harmless for everyone. Firms with debts still find them heavier in real terms as their own prices fall. And if people come to expect falling prices, they may delay spending, which can turn a benign deflation into a malign one.
Told only that prices are falling, you cannot tell which kind of deflation an economy has. Look at real output: falling output points to falling AD, growing output to rising AS.
Real Example: The textbook case of benign deflation is 1873-1896. Prices in many industrial countries fell by about 2% a year, yet output grew by about 2-3% a year, as railways and new machinery cut the cost of making and moving goods. Money played a part too: more countries tied their currencies to a limited supply of gold.
Exam Matters: In an Analyse question, name the curve that moved and back it with data: prices falling while output grows points to an increase in AS. Then explain the chain from lower costs to lower prices.
If the amount of money in an economy shrinks, there is less to spend on the same goods, so spending, output and prices all fall.
Most money today is not notes and coins but bank deposits, and banks create new deposits when they lend. So when banks lend less, or people repay loans without borrowing again, the money supply can shrink even though nobody decided to destroy money.
Less money means less spending. AD falls, so the price level falls, and output and jobs fall with it. This is excessive money growth in reverse, and it arrives as a fall in AD.
Real value of debt: the value of a debt measured by the goods and services the money owed could buy, so it rises when prices fall.
Falling prices then make things worse. A farmer who owes $10,000 must still repay $10,000, but if crop prices halve, she must sell twice as many crops to raise it. Borrowers cut spending or default, banks make losses and lend even less, and the money supply shrinks again.
Real Example: Between 1930 and 1933 more than 9,000 American banks failed, and the survivors lent less. Milton Friedman and Anna Schwartz calculated that the US money stock fell by about a third between 1929 and 1933. Output also fell by about a third, unemployment reached 25%, and consumer prices fell by about a quarter.
Exam Matters: Link money to spending in your chain: less money, so less spending, so AD shifts left, so prices and output fall. Then show why it can deepen: the real value of debts rises.
Inflation cuts what a sum of money can buy, so what matters to households is whether their income and savings keep up with prices.
A $50 weekly allowance buys less each year that prices rise, even though the number stays the same. What matters is not how many dollars you have, but what they buy: their purchasing power.
Real income: income adjusted for changes in the price level, measuring the quantity of goods and services it can buy.
Savers lose if the interest they earn is below inflation, because their balance grows more slowly than prices.
Real interest rate: the nominal interest rate minus the rate of inflation.
Deflation does the opposite: cash buys more. But it gives people a reason to put off buying, and it usually comes with falling incomes.
A 5% pay rise in a year when prices rise 8% is a real pay cut of about 3%. Unexpected inflation hurts most, because pay is agreed in advance; expected inflation can be written into the next pay deal.
Under deflation, workers who keep their jobs gain, as their pay buys more. But firms find it hard to cut money wages, so they cut jobs and hours instead.
Real Example: Japanese workers have seen their pay rise in yen but fall in what it buys. After inflation rose above 2% in 2022, real wages fell every year, including a 1.3% fall in 2025, the fourth year in a row.
Exam Matters: Name the group, say what happens to the purchasing power of what they earn or save, and compare two rates with figures: the pay rise against inflation, or the interest rate against inflation.
Unstable prices make it hard for firms to plan, so they invest less, and inflation faster than other countries' makes their goods harder to sell abroad.
Menu costs: the costs to firms of changing their prices, such as reprinting price lists and relabelling goods.
One price change costs little, but they add up: a supermarket with 20,000 products that reprices every month must change 240,000 labels a year. The higher inflation is, the more often this has to happen.
Investment: spending by firms on capital goods, such as machinery and buildings, used to produce goods and services in the future.
A new factory pays back over many years, so firms must predict costs and prices far ahead. High or unstable inflation makes that guess risky, so projects are delayed. Deflation discourages investment too: if prices are expected to fall, waiting is cheaper.
International competitiveness: the ability of a country's firms to sell their goods and services abroad, which depends on their prices and quality compared with other countries'.
What matters is inflation compared with trading partners'. If prices rise 6% at home and 2% abroad, the country's goods become dearer than its rivals'. With the same 6% at home and 9% abroad, they become relatively cheaper.
Real Example: Turkey's inflation jumped to about 16% in 2018 and stayed near 15% in 2019, during a currency crisis that made costs and prices hard to predict. Spending on new buildings and machinery fell by about 12% in 2019, although total output still grew by about 1%: firms and households held back from long-term projects.
Exam Matters: For an Examine question on investment, show both directions with reasons: inflation makes returns uncertain, and deflation makes waiting pay. Then weigh them: low and stable inflation is what investment needs.
Unexpected inflation moves purchasing power from lenders and people on fixed incomes to borrowers, and governments are usually among the biggest borrowers.
Fiscal drag: the rise in the share of income paid in tax when tax thresholds are not raised in line with inflation.
With fiscal drag, income tax takes a bigger bite even when real pay is unchanged, because more of a rising money wage lies above a fixed tax-free amount.
Distribution of income: the way a country's total income is shared between its households.
Unexpected inflation moves real income between groups rather than destroying it. Borrowers gain what lenders lose, because a fixed debt is repaid in money worth less. People on fixed incomes, such as some pensioners, lose because the same payment buys less each year.
Poorer households often suffer most. They tend to hold savings as cash, rely on fixed payments, and spend more of their income on food and energy, whose prices often rise fastest.
Real Example: The UK government gains from inflation on most of its debt, but not all. About a quarter of its bonds are index-linked: what it pays on them rises with inflation. When inflation jumped in 2022, those payments soared, and the government's interest bill rose by almost half in a year, to over £100 billion in the year to March 2023.
Exam Matters: For an Evaluate question, say who gains and who loses and why, then weigh whether the inflation was expected: expected inflation can be built into interest rates and pay deals, so it moves far less income.
A country whose prices rise faster than its trading partners' tends to sell fewer exports and buy more imports, so its current account worsens.
Two countries sell similar shoes to the world. Prices in one rise 10% a year, and in the other 2%. Buyers soon notice which pair has become the better deal.
Current account: the record of a country's trade in goods and services with the rest of the world, together with income and transfers to and from abroad, such as money sent home by relatives working abroad.
Its biggest part is usually the trade balance: the value of exports minus the value of imports. When a country buys more from abroad than it sells, the balance is negative, which is called a deficit.
This is where inflation's effect on competitiveness shows up. When a country's inflation is higher than its trading partners', its exports cost foreign buyers more and imports become relatively cheaper at home. If buyers switch easily, export earnings fall and spending on imports rises, so the current account moves towards deficit.
Two things decide how big the effect is: how easily buyers can switch to substitutes, and the exchange rate, the price of one currency in another. If the currency falls, it can offset the higher prices.
Deflation runs the chain the other way. Prices falling faster than partners' make exports cheaper, which helps the current account.
Real Example: Greece joined the euro in 2001, so its currency could no longer fall against Germany's. From December 2000 to December 2008 its consumer prices rose by about 29%, against about 14% in Germany. Greek goods became dearer compared with rivals', and its current account deficit averaged about 15% of GDP in 2007 and 2008.
Exam Matters: Build the chain in four links: relative inflation, export and import prices, how buyers respond, the current account. Then say what the size depends on, such as how easily buyers can switch.
Who counts as unemployed is decided by a definition, and the ILO's three tests let every country count it the same way.
Think of three people without a job. Nadia applies for jobs every day, Tomas cares full-time for his mother, and Lina is a student who is not looking for work. Only Nadia is unemployed on the International Labour Organization (ILO) definition that most countries use.
Unemployment (ILO measure): people without work who are available to start within two weeks and have actively looked for work in the past four weeks.
All three must be true at once. Anyone with paid work in the survey week, even one hour, is employed; anyone else who is not looking, or could not start soon, is economically inactive.
Economically inactive: people of working age who are not employed and are either not seeking work or not available to start.
Labour force: the employed plus the unemployed.
Unemployment rate: the number of unemployed people as a percentage of the labour force.
Countries use a survey rather than a register because who may register depends on each country's rules; the same questions everywhere make rates comparable.
Real Example: In April 2026, Poland's registered unemployment rate was 6.0%, but its rate in the EU's survey on the ILO definition was 3.0%. Registering as unemployed gives access to health insurance, so some people register who are not actively looking for work.
Exam Matters: A definition needs all three tests, not just ‘without a job’. In a calculation, find the labour force first and divide by it, not by the working-age population.
Even when there are more jobs than jobseekers, some people are always between jobs, because finding the right match takes time.
Imagine a city with more job vacancies than people looking for work. Some people there are still unemployed, because a worker who leaves one job rarely starts the next one the following Monday. Searching, applying and choosing between offers all take time.
Frictional unemployment: unemployment that occurs while people move between jobs or enter the labour market, because matching workers to suitable vacancies takes time.
Think of a graduate looking for a first job, someone who has quit to find a better one, or a parent returning to work after years at home. The jobs exist and so do the workers; they have not yet found each other.
Spells are usually short, and some of this unemployment is useful. A worker who takes six weeks to find a job that fits her skills may be far more productive in it than in the first job she was offered.
What sets its size is how quickly workers and employers can find each other, and how long people can afford to keep searching. That is why frictional unemployment never falls to zero, even in a booming economy.
Real Example: At the end of June 2022, Czech labour offices had 319,408 vacancies and 231,309 registered job seekers: fewer than one seeker per vacancy. Yet in June alone 30,851 people registered as newly out of work and 22,140 left the register for new jobs, and the survey rate on the ILO definition was about 2.4%.
Exam Matters: Frictional unemployment shows as short spells, with vacancies in the same trades and places as the jobseekers. Quote the length of spells and the vacancies, and say why they point to matching rather than a lack of jobs.
Some work comes and goes with the time of year, so unemployment follows a yearly pattern that you must see through before judging any change.
A ski instructor has plenty of work in winter and little in summer. A fruit picker is busy at harvest and idle between harvests. The work comes back every year, at roughly the same time.
Seasonal unemployment: unemployment that occurs because the demand for some kinds of labour rises and falls at certain times of the year, as in tourism, farming and construction.
Because it is predictable, workers, firms and governments can plan for it. Some workers save during the season, some find other work in the quiet months, and some employers keep staff on by giving them other tasks.
It also makes monthly figures hard to read. If unemployment rises every January, a rise this January tells you little on its own. So statisticians publish seasonally adjusted figures, with the usual yearly pattern taken out, and you can also compare a month with the same month a year earlier.
It matters most where a whole region depends on one seasonal industry. Then the quiet months cut the income of an entire area, not just of a few workers in a mixed economy.
Real Example: Croatia's registered unemployment fell from 87,935 at the end of January 2026 to 59,423 at the end of June, as hotels and restaurants hired for the tourist season. Every October its summer workers register again, and since 2013 Croatia's employment service has run job fairs so that some can spend the winter in Austrian hotels and restaurants.
Exam Matters: When data give monthly unemployment, ask whether a change could be seasonal before you explain it. Compare like with like: the same month a year apart, or seasonally adjusted figures.
When an industry shrinks or technology changes, the new jobs can need other skills or sit in other places, so the unemployed cannot take them.
Picture a town whose phone factory has closed. New jobs are appearing, but in software and nursing, and many of them in a city 300 km away. The factory workers want to work, yet they cannot fill these vacancies.
Structural unemployment: unemployment caused by a mismatch between the skills or location of workers and the jobs available, after long-term changes in the structure of the economy.
The changes behind it are long-term: an industry declines, a new technology takes over tasks, or production moves to another country. The jobs that go rarely come back in the same form, and the jobs that replace them ask for something different.
Occupational immobility: the difficulty workers face in moving from one type of job to another, because they lack the skills or qualifications it needs.
Geographical immobility: the difficulty workers face in moving from one area to another to take a job, for example because of housing costs or family ties.
This is why structural unemployment lasts. Learning a new trade can take years, and moving means leaving home and family, so a region can keep high unemployment while vacancies elsewhere stay open.
Real Example: Karviná lies in the Czech coal basin where the country's last hard-coal mine closed in January 2026. In June 2022, when Czechia as a whole had fewer than one registered job seeker per vacancy, Karviná had 9.7 seekers for every vacancy, and 8.0% of its working-age residents were registered as unemployed, against 3.1% nationally.
Exam Matters: Long spells, and vacancies that need other skills or sit in other regions, point to structural unemployment; short spells with vacancies in the same trades point to frictional. Quote the figures that separate them.
When total spending falls, firms need fewer workers to make less output, so jobs go in almost every industry at the same time.
Firms hire workers to make goods and services that people buy, so the demand for labour is derived from the demand for output. When total spending falls, firms need fewer workers.
That total spending is aggregate demand, the spending on a country's output. It can fall when households grow cautious, firms invest less or foreign buyers order less.
Demand-deficiency unemployment: unemployment caused by too little aggregate demand, so that firms need fewer workers; it rises in a recession and is also called cyclical unemployment.
On an AD/AS diagram, AD shifts left from AD₁ to AD₂ and real output falls from Y₁ to Y₂.
In Andara's recession year, real GDP fell by 4% and the number unemployed rose from 0.6 million to 0.9 million. Those 0.3 million extra people were out of work because spending fell, not because of their skills or the season.
It is general, hitting industries with little in common, and it moves with the economy: up in a recession, down in a recovery.
Real Example: Brazil's real GDP fell by about 3.5% in 2015 and 3.3% in 2016, as household spending and investment fell. In 2015 alone Brazil lost 1.54 million formal jobs across industry, construction and services, and its unemployment rate rose from about 7% in 2014 to about 13% in 2017.
Exam Matters: Show AD shifting left and real output falling from Y₁ to Y₂, then say in words that firms need fewer workers to make less output. That link is what turns the diagram into one about jobs.
If the real wage is held higher than the level that clears the labour market, more people want work than firms will hire, and the gap is unemployment.
Your pay matters for what it buys. If your wage and prices both rise by 5%, you can buy no more than before: your real wage has not changed.
Real wage: the money wage adjusted for inflation, showing the quantity of goods and services the wage can buy.
Firms want fewer workers when the real wage is higher, because each one costs more, while more people are willing to work. Left free, the real wage settles at W₀, where Q₀ workers are hired.
Now suppose a wage floor holds the real wage at W₁, higher than W₀, and it cannot fall. Firms hire only QD workers while QS people want work, so QS − QD are unemployed because of the wage.
Real-wage unemployment: unemployment that occurs when the real wage is held above the level at which the demand for labour equals the supply.
The real wage may be held up by a minimum wage raised in line with prices, by pay deals that rise with inflation, or, when prices are flat, by firms' reluctance to cut money wages.
How much unemployment this causes is disputed. A higher wage can make workers more productive and gives them more to spend, and Germany's experience suggests a new wage floor need not cut jobs.
Real Example: On 1 January 2015 Germany introduced its first national minimum wage, €8.50 an hour. A study of the country's employment records found that it raised low-paid workers' wages and did not lower employment. Instead, some workers moved from small, low-paying firms to larger, more productive ones.
Exam Matters: Unemployment is the gap between QD and QS at W₁, not the fall from Q₀ to QD. Label both curves, W₀, Q₀, W₁, QD and QS, and say that the wage cannot fall.
Losing a job cuts a household's spending at once, but the larger cost to a worker often comes years later, in lower pay.
When someone loses their job, the household's income and spending fall at once. If families still in work also cut back, saving in case they are next, consumer spending can fall by more than the wages lost.
Support usually replaces only part of a wage, so households with little savings cut back hardest. Their lost spending is lost sales for shops and services.
The lasting cost grows with time out of work. Skills date, contacts fade and employers ask about the gap on a CV, so the next job may pay less than the last. This lasting damage is called scarring.
Scarring: the lasting harm that a spell of unemployment does to a worker's earnings and job chances, which continues after they find work again.
High unemployment also weakens the bargaining position of those still in work, so pay rises are harder to win.
Real Example: A study of British men found that those who were unemployed when young earned 13-21% less at age 42 than similar men who had not been, after allowing for education, region and family background. The gap was 9-11% for those who avoided being unemployed again.
Exam Matters: Separate the short-run loss of income from the lasting loss of skills and earnings. Then say what the size depends on: how long the spell lasts and whether it happens again.
High unemployment shrinks many firms' markets but makes workers cheaper and easier to hire, so whether a firm loses depends on what it sells and how it produces.
When unemployment rises, households have less to spend and spend more carefully. Most firms see sales fall, and those selling things buyers can put off, such as cars, furniture and holidays, see the biggest falls. With orders shrinking, firms also hold back from buying new machines and buildings.
The same unemployment helps firms in other ways. There are more applicants for each vacancy, so hiring is quicker and cheaper. Workers are less likely to quit, and pressure for pay rises is weaker.
Which side wins depends on the firm. For most, lost sales matter more, because cheaper labour is no help without buyers; a firm whose costs are mostly wages and whose sales hold up can come out ahead. A firm selling essentials with few staff, such as a water supplier, sees little change either way.
Some firms even sell more. When money is tight, shoppers switch to cheaper versions of what they buy, so discount stores and budget brands can gain customers while dearer rivals lose them.
Real Example: Between 2007 and 2012, Spain's unemployment rate rose from about 8% to about 25%. New cars registered in Spain fell from about 1.63 million to about 711,000, down by more than half, and new lorries and vans fell by three-quarters. Households and firms can put these purchases off, and many did.
Exam Matters: In an 8-mark Examine on firms, give one chain for lost sales and one for cheaper labour, then judge which is larger for the firm or industry named. Use any data on sales or wages as your evidence.
Rising unemployment means the government collects less tax and pays out more support at the same time, so its budget worsens without any new decision.
A government's budget has two sides: what it collects, mainly in taxes, and what it spends. When spending is greater, the gap is a budget deficit, and the government borrows to cover it.
Budget deficit: the amount by which government spending is greater than government revenue over a year.
Rising unemployment moves both sides the wrong way. Fewer earners pay less income tax, households buying less pay less tax on spending, and firms selling less pay less tax on profits. At the same time, more people claim support.
No one has to decide anything for this to happen: the same tax and benefit rules simply apply to more people out of work. When unemployment falls, it all runs in reverse.
There is also a cost no budget records: the tax the unemployed would have paid on the output they could have produced.
Real Example: Sweden's unemployment rate rose from 2.3% in 1990 to 10.1% in 1993, and its public finances swung from a surplus of 4.1% of GDP to a deficit of 11.2%. Rescuing its banks cost about 3.6% of GDP at first, so most of that swing of over 15 points came from other causes during the slump.
Exam Matters: For a 4-mark Explain on public finances, give both sides of the budget, each linked to unemployment, and end at the deficit and borrowing. Do not skip the middle step: say why tax revenue falls.
Unemployed workers are a resource the economy has but does not use, so it produces less than it could, and that lost output never comes back.
A factory that runs one shift instead of three, with its machines and staff idle for the rest of the day, loses output it can never get back. So does an economy with unemployed workers.
Production possibility frontier (PPF): a curve showing the maximum combinations of two goods an economy can produce when all its resources are fully and efficiently used.
The frontier is drawn at full employment, where only short frictional spells remain. Any more unemployment than that puts the economy at a point inside the frontier, making less of both goods; the distance to the frontier is the output lost.
In a short slump the frontier does not move, since the workers, machines and land still exist. But the output not made cannot be made up later.
Long unemployment is different. Skills fade, some workers give up looking and idle machines are scrapped, so capacity shrinks and the frontier itself shifts in. This is hysteresis.
Hysteresis: the lasting fall in an economy's productive capacity caused by a long period of high unemployment, which continues after demand recovers.
Real Example: Greece's real output fell by about a quarter between 2008 and 2013, while its unemployment rate rose from 7.7% to 27.3%. By 2014 almost three in four of the unemployed had been out of work for over a year, the kind of long joblessness linked with hysteresis. In 2019 real output was still about a fifth lower than in 2008.
Exam Matters: For a Draw question, label both axes with the two goods, draw the frontier bowed outward, and mark a point on it and a point inside it. Show the lost output as the distance between them.
Unemployment also harms health, families and whole towns, and these costs last long after the jobs return and show up in no economic total.
Some costs of unemployment never appear in GDP or in the government's budget. They fall on people's health, on families and on the places where they live.
Two features make these costs matter. They are persistent: they can outlast the unemployment that caused them by decades. They are also concentrated, falling on particular places and families rather than spreading across the country.
That is why a national unemployment rate can understate them. The same rate spread thinly across a country does less damage than the same rate piled into a few towns.
Real Example: Britain's coal industry employed 237,000 people in 1980; after the 1984-85 miners' strike almost all of it closed. A 2024 study of the former coalfields found unemployment on the ILO measure close to the national average, yet 11.3% of working-age adults there claimed incapacity benefits, which the unemployment figures do not count, against 8.1% across Britain.
Exam Matters: Social costs make strong evaluation in a 14- or 20-mark answer on the costs of unemployment: they are real but hard to measure. Say where the unemployment is concentrated and how long it has lasted, since both change the size of these costs.
Some people have work, but not enough of it or not the right kind, and the unemployment rate cannot see them.
Kwame is a trained accountant. He works 12 hours a week in a phone shop and wants a full-time job in accounting. He did paid work in the survey week, so he is counted as employed, not unemployed.
Underemployment: a situation in which people in work want to work more hours than they can get, or work in jobs that do not use their skills or qualifications.
There are two forms. Time-related underemployment means working fewer hours than you want and could work. Skill-related underemployment means doing a job that needs less skill or training than you have.
Andara shows why it needs its own measure. Of its 11.4 million employed, 0.8 million work part-time and want full-time work. All of them count as employed, so Andara's unemployment rate is 5% whether they exist or not.
So an economy with low unemployment and high underemployment is weaker than its unemployment rate suggests. That is why many statistics offices publish an underemployment rate beside it.
Real Example: Australia publishes an underemployment rate every month beside its unemployment rate. In August 2026, 4.6% of the labour force was unemployed and a further 6.2% was underemployed: in work, but wanting more hours. Added together they give a wider measure of unused labour, 10.8%, not a higher unemployment rate.
Exam Matters: To distinguish them, say what each person has: the unemployed have no paid work; the underemployed have work but want more hours or better use of their skills.
Three rates with two different denominators tell different stories, so read a change in one beside the other two.
The unemployment rate uses the labour force; two more rates use the whole working-age population.
Employment rate: the number of people employed as a percentage of the working-age population.
Economic inactivity rate: the number of economically inactive people as a percentage of the working-age population.
Why do 76% and 20% leave 4%? That 4% is the unemployed as a share of the working-age population, 0.6 ÷ 15; the unemployment rate divides by the smaller labour force, so it is 5%. The share in the labour force, 80% here, is the participation rate: 100% minus the inactivity rate.
Discouraged workers, who want a job but have stopped looking, count as inactive, so when they give up, the unemployment rate falls although no one has found work.
Inactivity can rise for good reasons, such as more young people studying. And when students or carers start looking for work, the unemployment rate can rise in a good year.
Real Example: In the last quarter of 2025, South Africa's official unemployment rate fell from 31.9% to 31.4%. But employment rose by only 44,000 while the number unemployed fell by 172,000, and discouraged job-seekers rose by 233,000.
Exam Matters: Write each denominator before you divide: the labour force for the unemployment rate, the working-age population for the other two.
When people arrive to live and work, they add to both the labour force and employment, so migration can raise jobs and the unemployment rate in the same year.
What matters for the labour market is the balance of people of working age arriving and leaving.
Net migration: the number of people who come to live in a country (immigration) minus the number who leave to live elsewhere (emigration) over a period.
Employment and the unemployment rate both rose, because the labour force grew faster than employment. Arrivals can fill vacancies local workers lack the skills for and spend their wages, creating jobs, but where they compete for the same jobs and wages cannot fall, local unemployment may rise.
Emigration works the other way. When people of working age leave, the labour force shrinks; if they were unemployed, the rate falls without anyone finding work, and if they were skilled, vacancies at home may go unfilled.
Real Example: Canada's population grew by about 744,000 in 2024, 97% of it through international migration. Employment rose by 413,000, yet the unemployment rate rose from 5.8% to 6.7%. The Bank of Canada found that newcomers and young people, a quarter of the labour force, accounted for about three-quarters of the rise since early 2023.
Exam Matters: In an answer on migration, separate the short-run arithmetic (the labour force against employment) from the longer-run effects (skills gaps filled, extra spending), and judge which matters more for the economy in the question.
Trade is only part of the money that flows between a country and the rest of the world; the current account also records income and gifts.
Money crosses a country's border in many ways: a firm sells machinery abroad, a family pays for a holiday overseas, a worker from across the border takes her wages home. The country keeps one record of all of it.
Balance of payments: a record of all transactions between a country's residents and the rest of the world over a period of time, usually a year.
It has three accounts. The financial account records the buying and selling of assets across the border, such as a foreign firm buying a hotel, and borrowing and lending. The capital account records capital transfers, such as a foreign government paying for a new bridge.
The third, the current account, has four lines. Together the three accounts balance: when more money leaves on the current account than arrives, borrowing abroad or selling assets to foreigners covers the gap.
Current account: the record of a country's trade in goods and services with the rest of the world, together with income and transfers to and from abroad, such as money sent home by relatives working abroad.
Primary income: income earned from taking part in production or from owning assets, such as wages, profits, interest and dividends.
Secondary income: transfers between a country's residents and the rest of the world with nothing given in return, such as remittances (money that people working abroad send home) and aid.
What the money is for decides where a gift goes. Money given, not lent, to build or buy an asset, or a cancelled debt, is a capital transfer. Gifts and aid for day-to-day spending, such as food or medicine, are secondary income.
On each line, money in minus money out gives a balance. A positive balance is a surplus, and a negative one is a deficit.
Real Example: In the year to mid-July 2026, Nepalis working abroad sent home about $16 billion, more than seven times what Nepal earned from selling goods abroad. None of it is trade: it is secondary income, a flow that Nepal's exports and imports alone would miss.
Exam Matters: Name the line that records a flow and the way the money moves: 'a remittance from a worker abroad is a secondary income inflow, so it raises the current account balance'.
A country's goods line and services line can point in opposite directions, so its trade balance needs both, added with their signs.
Some countries make many goods but buy in services such as insurance. Others sell services, such as software or banking, and buy in many of their goods. To judge a country's trade, you need both.
Trade in goods and services balance: the value of a country's exports of goods and services minus the value of its imports of goods and services.
The first bracket is the trade in goods balance and the second the trade in services balance. Either can be negative, so keep each sign when you add.
Two lines pointing different ways is common. They show what a country sells well and what it relies on others for.
Real Example: In the year to March 2026, India bought about $337 billion more goods than it sold, over a third of that gap in oil. But it earned about $217 billion more from services than it spent, with computer and business services among its biggest earners, so its trade in goods and services deficit was about $120 billion.
Exam Matters: In a Calculate question, write each line's balance with its sign, add them, and finish with the word surplus or deficit, so the reader sees which way the balance points.
Adding income and transfers to the trade balance can flip its sign, and a deficit or surplus tells you little until you know what caused it.
The trade balance leaves out income and transfers. Add primary and secondary income to it and you have the current account balance, which can point the other way.
Current account deficit: when more money flows out of a country than flows in across the four lines of the current account.
Current account surplus: when more money flows into a country than flows out across the four lines of the current account.
A deficit is paid for by borrowing from abroad or selling assets to foreigners, which is why the three accounts balance.
So is a deficit bad and a surplus good? Neither is automatic. It depends on what caused the balance, how large it is compared with GDP, and whether it can last.
Real Example: In 1986 Australia's treasurer warned that its current account deficits could make it a 'banana republic'. They went on, averaging about 4% of GDP through the 1980s, 1990s and 2000s, which the Reserve Bank later put down to profitable investment drawing in money from abroad. Its first quarterly surplus since 1975 came in mid-2019.
Exam Matters: Show the sum line by line with signs and label the result a surplus or a deficit. If asked what the balance means, name its cause before you call it good or bad.
One figure adds up everything a country produces. Economic growth is about how fast that figure changes, not how big it is.
Not all the income from a country's output belongs to the people who live there. GNI follows the income to its owners.