AQA A-Level Economics: The Measurement of Macroeconomic Performance — Revision Notes

Condensed for the final weeks. For the full explanation, use the The Measurement of Macroeconomic Performance study guide.

Government macroeconomic policy objectives (3.2.1.1)

1. Economic growth
2. Price stability
3. Minimising unemployment
4. Stable balance of payments on current account

Plus awareness of other objectives: balancing the budget, equitable income distribution — their relative importance changes over time.

The specific angle tested: not just naming the four objectives, but recognising governments frequently cannot achieve all four simultaneously.

Worked example: a policy conflict

Objective 1: economic growth, pursued via policies raising
             aggregate demand
Effect:      rising incomes -> rising consumer spending, including
             on IMPORTS
Objective 2: stable balance of payments on current account
Conflict:    if imports rise faster than exports, the current
             account balance can WORSEN -- tension between growth
             and external balance

This objective → effect → objective → conflict structure works for most “explain the conflict” questions.

Macroeconomic indicators (3.2.1.2)

Indicator	Measures
Real GDP, real GDP per capita	Economic growth, living standards
CPI / RPI	Price stability
Unemployment measures	The unemployment objective
Balance of payments (current account)	External balance objective
Productivity	Efficiency of resource use

Match indicator to objective — this converts recall into application, which is what’s actually rewarded.

Uses of index numbers (3.2.1.3)

Base year = 100 (the reference point)

An index number is relative, not absolute: a change from 100 to 103 = a 3% increase relative to the base year, not “an absolute value of 3.”

Index numbers use a “basket of goods and services” (representing typical spending), weighted by relative importance in spending. You do NOT need the detailed construction of RPI/CPI — only awareness of these underlying features (base year, weighting, “average family,” basket of goods).

Uses of national income data (3.2.1.4, A-level only)

National income data (e.g. real GDP per capita) is widely used but limited as a measure of living standards: it ignores the distribution of income, the informal economy, externalities, and non-marketed activity (e.g. unpaid work).

International comparisons use exchange rates based on purchasing power parity (PPP), not market exchange rates — PPP adjusts for differences in the cost of living between countries, so it reflects what income can actually buy.

Worked example: interpreting an index number

A price index rises from 100 in Year 1 to 108 in Year 2. What has happened to prices?

Change = 108 - 100 = 8 index points
Percentage change = 8 / 100 x 100 = 8%
Interpretation: prices have risen by 8% relative to Year 1 (the
                base year) -- NOT an absolute rise of "8"

Worked example: a second policy conflict

Explain why pursuing low unemployment through expansionary fiscal policy might conflict with price stability.

Objective 1: minimising unemployment, pursued via increased
             government spending (expansionary fiscal policy)
Effect:      higher government spending raises aggregate demand,
             increasing output and employment, but can also push
             up prices if the economy is close to full capacity
Objective 2: price stability (low, stable inflation)
Conflict:    demand-side stimulus aimed at reducing unemployment
             can generate demand-pull inflation, creating tension
             between the unemployment objective and price stability

Having two or three prepared, explained conflicts ready (growth vs. balance of payments; unemployment vs. inflation are the two most commonly examined pairs) rather than trying to construct one from scratch in the exam is a high-value piece of preparation for this sub-topic.

Why this sits at the start of 3.2 The National and International Economy

3.2.1 establishes the objectives and indicators that every later sub-topic in this unit assumes as background: how the macroeconomy works (3.2.2, covering the circular flow of income and aggregate demand and aggregate supply analysis), demand-side policy (covered later, in the financial markets and monetary policy and the fiscal and supply-side policy sub-topics), and international trade content all discuss their effects in terms of these same four objectives and the indicators used to measure them. A policy question later in the course that asks you to “evaluate” a demand-side policy is implicitly asking you to assess its effect against growth, inflation, unemployment and the balance of payments – the exact framework introduced here. Treat 3.2.1 as the vocabulary and framework for the rest of the unit, not an isolated opening sub-topic.

Key terms

Real GDP — total value of goods/services produced, adjusted for inflation, for genuine comparison over time. Real GDP per capita — real GDP ÷ population; a broad living-standards indicator. Balance of payments on current account — record of trade in goods/services plus income flows with the rest of the world. Base year — the reference year in an index series, set to 100. Weighting — relative importance assigned to items in a composite index.

A note on why other objectives matter too

Beyond the four headline objectives, the specification explicitly names balancing the government’s own budget and achieving a more equitable distribution of income as objectives some governments also pursue – and flags that the importance attached to each objective changes over time and between governments. A question that asks you to evaluate a government’s overall macroeconomic performance may expect you to look beyond the four standard indicators if the context given (a specific country, a specific government’s stated priorities) points toward one of these additional objectives – flexibility in applying the objective framework to the scenario given, rather than mechanically listing only the four headline objectives every time, is what higher-mark evaluative answers do.

Common mistakes

• Listing the four objectives without being able to explain a specific conflict between two of them.
• Naming an indicator without linking it to the objective it measures.
• Assuming detailed technical knowledge of RPI/CPI construction is required — only awareness of underlying features is expected.
• Treating index numbers as absolute values rather than relative measures anchored to a base year.

Quick self-test

• Name the four main government macroeconomic policy objectives, plus one additional objective.
• Explain, using the objective-effect-conflict structure, why growth and low inflation might conflict.
• Match real GDP per capita, CPI and the balance of payments to the objective each measures.
• Explain what a fall in a price index from 100 to 96 represents.
• State two underlying features of RPI/CPI you ARE expected to know, without needing their exact construction.
• (A-level only) State two 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 study guide
• 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.