AQA A-Level Economics: The Measurement of Macroeconomic Performance (7136)

This guide covers 3.2.1 The Measurement of Macroeconomic Performance, the opening sub-topic of 3.2 The National and International Economy in AQA A-level Economics (7136), AS and A-level exams June 2016 onwards, Version 1.3. AQA AS Economics (7135) has the same sub-topic, as 3.2.1 of 3.2 The national economy in a global context, but with three parts only: 3.2.1.4 Uses of national income data is A-level content (numbered 4.2.1.4 in the combined AS and A-level specification PDF).

Syllabus coverage

AQA A-LEVEL ECONOMICS (7136) — 3.2.1 THE MEASUREMENT OF MACROECONOMIC PERFORMANCE (AS 7135: 3.2.1.1-3.2.1.3 only)

• 3.2.1.1 The objectives of government economic policy — the main objectives of government macroeconomic policy: economic growth, price stability, minimising unemployment, and a stable balance of payments on current account; the possibility of conflict arising, at least in the short run, when attempting to achieve these objectives; awareness that governments may also pursue other objectives, such as balancing the budget and achieving an equitable distribution of income, and that the importance attached to different objectives changes over time
• 3.2.1.2 Macroeconomic indicators — data commonly used to measure economic performance, such as real GDP, real GDP per capita, Consumer Prices and Retail Prices Indices (CPI/RPI), measures of unemployment, productivity, and the balance of payments on current account
• 3.2.1.3 Uses of index numbers — how index numbers are calculated and interpreted, including the base year and the use of weights; how index numbers are used to measure changes in the price level and other economic variables; awareness of the underlying features of indices such as RPI and CPI, including the concept of the “average family” and a “basket of goods and services” (detailed technical knowledge of their construction is not expected)
• 3.2.1.4 Uses of national income data (A-level only) — the use and limitations of national income data to assess changes in living standards over time and to compare living standards between countries, and the importance of purchasing power parity (PPP) exchange rates in making international comparisons

How to approach it

The four main policy objectives (economic growth, price stability, minimising unemployment, stable balance of payments) are best revised together with the conflicts between them, since this is the specific angle 3.2.1.1 asks students to understand — not just naming the objectives, but recognising that governments frequently cannot achieve all four simultaneously. A classic example is that policies boosting economic growth (such as expansionary demand-side policy) can also raise inflation and worsen the balance of payments through higher import demand, illustrating a genuine short-run conflict.

For 3.2.1.2, know which indicator measures which objective: real GDP and real GDP per capita relate to economic growth and living standards; CPI/RPI relate to price stability; unemployment measures relate to the unemployment objective; and the balance of payments on current account relates directly to that objective. Being able to match indicator to objective, rather than listing indicators in isolation, is what converts recall into application.

For 3.2.1.3, understand index numbers conceptually rather than mechanically — you are not expected to know the detailed construction of RPI or CPI, but you should understand that they are built from a “basket of goods and services” representing typical spending patterns, weighted according to their relative importance in that spending, and expressed relative to a base year set at 100.

For 3.2.1.4 (A-level only), be ready to evaluate national income data rather than just quote it: it is a widely used but limited measure of living standards, since it ignores the distribution of income, the size and value of the informal economy, externalities, and non-marketed activity such as unpaid work. When comparing living standards between countries, exchange rates based on purchasing power parity (PPP) are used rather than market exchange rates, because PPP adjusts for differences in the cost of living between countries, giving a more meaningful comparison of what income can actually buy in each country.

Worked example: explaining a policy conflict

A question asks candidates to explain why the government’s objectives of economic growth and a stable balance of payments might conflict in the short run.

Objective 1:  economic growth, often pursued through policies that
              raise aggregate demand
Effect:       rising incomes increase consumer spending, including
              spending on imported goods
Objective 2:  a stable balance of payments on current account
Conflict:     if imports rise faster than exports as a result of
              growth-boosting policy, the current account balance
              can worsen, creating tension between pursuing growth
              and maintaining external balance

This objective-effect-objective-conflict structure works for most “explain the conflict between two objectives” questions in this sub-topic.

Key terms to define precisely

Real GDP — the total value of goods and services produced by an economy in a given period, adjusted for inflation, allowing genuine output changes to be compared over time. Real GDP per capita — real GDP divided by population, used as a broad indicator of average living standards. Balance of payments on current account — a record of a country’s trade in goods and services, plus primary and secondary income flows, with the rest of the world; a deficit means more is flowing out than in. Base year — the reference year in an index number series, conventionally set to a value of 100, against which changes in later years are measured. Weighting — the relative importance assigned to different items (such as categories of spending in a basket of goods) when calculating a composite index number, so that items which take up a larger share of typical spending have a proportionally larger effect on the index. Being able to explain what a change in an index number from, say, 100 to 103 actually represents — a 3% increase relative to the base year, not an absolute value of “3” — is a foundational skill that later index-number-based questions in this course depend on.

Common mistakes

Listing the four main objectives without being able to explain a specific conflict between any two of them. Naming a macroeconomic indicator without linking it to the specific objective it measures. Assuming detailed technical knowledge of how RPI or CPI is constructed is required, when the specification only expects awareness of their underlying features. Treating index numbers as absolute values rather than understanding them as relative measures anchored to a base year.

Quick revision checklist

• Learn the four main government macroeconomic policy objectives and one additional objective beyond them.
• Prepare at least one specific, explained conflict between two objectives.
• Match each macroeconomic indicator to the objective it is used to measure.
• Understand the concepts of base year, weighting and “basket of goods” without needing RPI/CPI’s exact construction method.
• A-level only: be able to state the limitations of national income data as a measure of living standards, and explain why PPP exchange rates are used for international comparisons.

Related resources

• The Measurement of Macroeconomic Performance revision notes
• The Measurement of Macroeconomic Performance practice questions

Official syllabus

AQA AS and A-level Economics (7135/7136) specification, Version 1.3, June 2016 exams onwards — aqa.org.uk/7136.