Cambridge International AS and A Level Economics: Unemployment and price stability (9708) – Revision Notes

These notes condense sections 4.5 (Unemployment) and 4.6 (Price stability), outcomes 4.5.1 to 4.5.4 and 4.6.1 to 4.6.5, of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 4 is AS Level content and is assumed knowledge for A Level Papers 3 and 4. For full explanations read the study guide, then test yourself with the practice questions. All countries and figures here are invented and illustrative.

Hub: Cambridge A Level Economics. Checklist: printable checklist. Not sure where to start? Try a free 10-minute diagnostic. More topic 4 questions are in the macroeconomy practice set.

4.5.1 and 4.5.2: meaning and measurement

Unemployed means able and willing to work at the going wage, actively seeking work, and without a job. Labour force = employed + unemployed.

Formula	Working
Unemployment rate	unemployed ÷ labour force × 100
Participation rate	labour force ÷ working-age population × 100

Method in steps

1. Add employed and unemployed to find the labour force.
2. Divide the unemployed by that total, not by the population.
3. Multiply by 100 and state the unit (%).

Worked reminder. Employed 18.4 million, unemployed 1.1 million, working-age population 26.0 million. Labour force 19.5 million. Rate 5.6%. Participation 75.0%.

Measure	Strength	Weakness
Labour force survey (sample of households)	Comparable across countries and years	Sampling error; relies on honest answers
Claimant count (people receiving benefit)	Cheap, quick, regular	Depends on benefit rules; misses the ineligible and those who do not register

Difficulties. Discouraged workers leave the labour force (understates). Hidden unemployment and underemployment (understates). Informal work by claimants (overstates). Averages hide regional and age differences.

Method for a type of unemployment question

1. Name the type and state its cause in one clause.
2. Say what job-seekers lack: information (frictional), skills or location (structural), demand (cyclical), work in the off-season (seasonal) or a role the machine now does (technological).
3. Add how long it lasts and why.

Trap. Employment 18.4 million unchanged and 0.2 million jobless people give up looking: unemployed falls from 1.1 to 0.9 million, so the rate falls from 5.6% to 4.7%, though no one gained a job.

4.5.3: types of unemployment

Type	Cause	Lasts	Example
Frictional	Time to match workers and vacancies	Short	School leaver searching
Structural	Skills or location mismatch after an industry declines	Long	Mine closes
Cyclical	Fall in aggregate demand	Until recovery	Downturn in orders
Seasonal	Demand varies by time of year	Recurring	Beach staff in winter
Technological	Machines replace labour	Long unless retrained	Automated warehouse

Cyclical chain. AD falls (shifts left along SRAS), real output falls, firms cut labour, unemployment rises, incomes fall, AD falls further.

Structural chain. Industry declines, workers hold skills no one wants or live far from vacancies (occupational and geographical immobility), jobs go unfilled elsewhere while people stay unemployed.

4.5.4: consequences of unemployment

Who	Effects
Individuals	Lower income, poverty, loss of skills, stress
Firms	Weaker demand; but a larger pool of workers and less wage pressure
Government	Higher benefit spending, lower tax receipts
Economy	Output below potential, wasted resources, inequality

Worked reminder. Per unemployed person: output 30,000 cu, benefits 6,000 cu, tax forgone 4,500 cu. For 1.1 million people: lost output 33,000 million cu; fiscal cost (6,000 + 4,500) × 1.1m = 11,550 million cu.

Chain for the economy. Fewer workers employed, so output sits below what the economy could produce. Lower income and spending, so less tax and more benefit spending. Long spells erode skills, so the jobless are harder to employ later.

Evaluate by type, duration, concentration in a region, and benefit levels.

4.6.1: definitions

Term	Meaning	Prices
Inflation	Sustained rise in the general price level	Rising
Deflation	Sustained fall in the general price level	Falling
Disinflation	Fall in the rate of inflation	Still rising, more slowly

4.6.2: the CPI

Step	What happens
1	Survey households to find what they buy
2	Group spending into categories; each category gets a weight (its share of spending)
3	Collect prices; set the base year index to 100
4	CPI = sum of (weight × category index) ÷ sum of weights
5	Inflation rate = (CPI now − CPI before) ÷ CPI before × 100

Worked reminder. Weights 30, 35, 15, 20 with indices 108, 104, 112, 100 give CPI = (3,240 + 3,640 + 1,680 + 2,000) ÷ 100 = 105.6. If the next CPI is 108.2, inflation = 2.6 ÷ 105.6 × 100 = 2.5%.

Difficulties. Basket and weights age; substitution is ignored; quality change and new goods; households differ (no typical household); regional and informal prices; costly sampling.

4.6.3: nominal and real

Quantity	Formula
Real value	nominal ÷ price index × 100
Real growth (close)	nominal growth − inflation
Exact real growth	(1 + nominal) ÷ (1 + inflation) − 1

Worked reminder. Wage 2,520 cu with CPI 105.6: real = 2,520 ÷ 105.6 × 100 = 2,386.4 cu. A wage up 5.0% with inflation 5.6% has fallen about 0.6% in real terms.

Second reminder (real GDP). Nominal GDP rises from 520 to 546 billion cu (+5.0%) while the price index rises from 100 to 104. Real GDP = 546 ÷ 104 × 100 = 525 billion cu, so real growth is (525 − 520) ÷ 520 × 100 = 1.0%.

Method in steps

1. Choose the price index for the year of the nominal figure.
2. Divide nominal by the index and multiply by 100.
3. Compare real figures from different years, not nominal ones.

4.6.4: causes of inflation

	Demand-pull	Cost-push
Shift	AD right	SRAS left
Output	Rises	Falls
Employment	Rises	Falls
Causes	Lower taxes, confidence, government spending, exports	Wages above productivity, raw material or energy costs, weaker currency, indirect taxes

Worked reminder. Start with price level 100 and output 400. Case 1 ends at price level 105 and output 412: AD has shifted right (demand-pull). Case 2 ends at price level 105 and output 392: SRAS has shifted left (cost-push). Both show 5% inflation.

Distinguish by output. Rising prices with rising output point to demand-pull. Rising prices with falling output point to cost-push (stagflation).

4.6.5: consequences of inflation

Consequence	Chain
Redistribution	Fixed incomes and savers lose; borrowers gain; lenders lose
Menu and shoe-leather costs	Firms reprice; households spend time managing money
Uncertainty	Investment delayed
Competitiveness	Domestic prices rise faster than rivals’, exports fall, imports rise
Wage-price spiral	Prices up, wages up, costs up, prices up

Worked reminder. Someone holding 8,000 cu in cash while prices rise 4% holds buying power worth 8,000 ÷ 1.04 = 7,692.3 cu, a fall of 307.7 cu, or 3.8%.

Evaluate by rate, whether inflation was anticipated, and whether incomes keep pace.

Must-know distinctions

• Unemployment rate (base: labour force) versus participation rate (base: working-age population).
• Frictional (matching delay) versus structural (lasting mismatch).
• Cyclical (AD falls) versus structural (some industries decline).
• Disinflation (prices rise slower) versus deflation (prices fall).
• Cost-push (SRAS) versus demand-pull (AD).
• Nominal (money value) versus real (adjusted for prices).

Quick self-test

1. Employed 240 thousand, unemployed 16 thousand. State the labour force and the unemployment rate.
2. A labour force of 480 contains 36 unemployed. Find the rate.
3. A car plant lays off workers because orders fall. Which type is this?
4. CPI rises from 125 to 130. Calculate inflation.
5. A wage of 3,300 cu when the CPI is 110. Find the real wage.
6. Pay rises 8% and prices rise 5%. Find exact real pay growth, to 1 d.p.
7. CPI falls from 104 to 103.2. Find the percentage change, to 1 d.p., and name it.
8. Inflation falls from 5% to 3%. Name the term.
9. A CPI has a category with weight 40% and price rise 5%, and another with weight 60% and rise 2%. Find inflation.
10. Which curve shifts in cost-push inflation, and in which direction?
11. Give two reasons the measured unemployment rate may understate joblessness.

Answers

1. Labour force 256 thousand. Rate 16 ÷ 256 × 100 = 6.25%, or 6.3%.
2. 36 ÷ 480 × 100 = 7.5%.
3. Cyclical (demand-deficient).
4. (130 − 125) ÷ 125 × 100 = 4.0%.
5. 3,300 ÷ 110 × 100 = 3,000 cu.
6. 1.08 ÷ 1.05 − 1 = 2.857%, so 2.9%.
7. (103.2 − 104) ÷ 104 × 100 = −0.8%. This is deflation.
8. Disinflation.
9. 0.4 × 5 + 0.6 × 2 = 2 + 1.2 = 3.2%.
10. SRAS shifts left.
11. Any two of: discouraged workers leaving the labour force; hidden unemployment; underemployment; claimants not registered.

Where marks are usually lost

• Dividing by the whole population instead of the labour force.
• Using the new CPI as the denominator in the inflation formula.
• Saying disinflation means prices are falling.
• Drawing cost-push as a rightward AD shift, or demand-pull as an SRAS shift.
• Naming a type of unemployment without linking it to its cause.
• Listing consequences of inflation without explaining who gains or loses.
• Forgetting to say that real values need a price index.
• Evaluating with “it depends” and no reason for what it depends on.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 4.5 and 4.6 (Cambridge University Press & Assessment).