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

This guide covers 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. A Level candidates study it too, and the syllabus treats it as assumed knowledge for A Level Papers 3 and 4. Every country, firm and figure below is invented for illustration. None is a real statistic.

Use the Cambridge A Level Economics hub and the printable checklist to track progress. Next, use the revision notes and the practice questions. The macroeconomy practice set covers more of topic 4. To find weak spots first, take a free 10-minute diagnostic.

What this guide covers

Outcome	What you must be able to do
4.5.1	Explain the meaning of unemployment
4.5.2	Describe measures of unemployment and the difficulties in measuring it
4.5.3	Explain the causes and types: frictional, structural, cyclical, seasonal, technological
4.5.4	Explain the consequences of unemployment
4.6.1	Define inflation, deflation and disinflation
4.6.2	Explain how the consumer price index (CPI) measures price changes, and its difficulties
4.6.3	Distinguish money (nominal) values from real data
4.6.4	Explain cost-push and demand-pull inflation
4.6.5	Explain the consequences of inflation

4.5.1: the meaning of unemployment

A person is unemployed if they are able and willing to work at the going wage rate, are actively looking and have no job. People in work, people who cannot work and people who choose not to look (full-time students, carers, the retired) are not unemployed. The employed plus the unemployed make up the labour force.

Worked example 1. Country A has a working-age population of 26.0 million. There are 18.4 million employed and 1.1 million unemployed.

Labour force       = 18.4 + 1.1 = 19.5 million
Unemployment rate  = 1.1 ÷ 19.5 × 100 = 5.6%
Participation rate = 19.5 ÷ 26.0 × 100 = 75.0%
Not in labour force = 26.0 − 19.5 = 6.5 million

The base is the labour force, not the whole population.

4.5.2: measures and measurement difficulties

There are two common approaches. A labour force survey asks a sample of households about their situation, using an agreed definition of looking for work. A claimant count counts people who register for unemployment benefit. The survey allows comparison across countries and years. The claimant count is quick but depends on benefit rules.

Worked example 2. In Country A the survey gives 1.1 million unemployed and the claimant count gives 0.78 million, 70.9% of the survey figure. The gap may arise because some jobless people are ineligible for benefit or have not registered.

Difficulty	Effect on the measured rate
Discouraged workers stop searching, so leave the labour force	Understates unemployment
Hidden unemployment: people who would work if jobs existed	Understates it
Underemployment: part-timers who want full-time hours count as employed	Understates it
Informal or illegal work by people who claim benefit	Overstates it
Sampling error and differing definitions between countries and years	Either way
One national average hides regions, age groups and ethnic groups	Hides detail

Worked example 3: a rate that falls without more jobs. In the following year employment in Country A stays at 18.4 million, but 0.2 million jobless people give up searching. Unemployment is now 0.9 million.

Labour force = 18.4 + 0.9 = 19.3 million
Rate         = 0.9 ÷ 19.3 × 100 = 4.7%   (down from 5.6%)

Those 0.2 million people still have no job. Counting them as unemployed would give 1.1 million out of 19.5 million, which is 5.6% again. Ask who has been left out.

4.5.3: causes and types

Type	Cause	Illustration (invented)
Frictional	Time taken to match job-seekers with vacancies; imperfect information	A graduate searches for six weeks
Structural	A lasting mismatch between workers’ skills or location and the jobs on offer, after an industry declines	A coal-mining town loses its mine; jobs exist on the coast needing different skills
Cyclical (demand-deficient)	A fall in aggregate demand, so firms cut output and labour	A downturn cuts demand for cars
Seasonal	Demand for labour varies with the time of year	Ski instructors in summer
Technological	Machines or software replace workers	Self-service tills replace cashiers

Technological unemployment is structural when displaced workers lack the new skills. Frictional unemployment is short. Structural unemployment can last years because retraining takes time and housing costs block moves.

Worked example 4. A region has 600 unemployed people: 90 frictional, 210 structural, 150 cyclical, 100 seasonal and 50 technological. These sum to 600, so the shares are 15%, 35%, 25%, 16.7% and 8.3%. A boom would mainly remove the cyclical 25%, not the structural 35%.

Cyclical unemployment in AD/AS words. With price level on the vertical axis and real output on the horizontal axis, aggregate demand shifts left from AD1 to AD2 along an upward-sloping SRAS curve. The equilibrium moves to lower output, below the level where all willing workers are employed. Firms need fewer workers, so employment falls.

4.5.4: consequences of unemployment

Worked example 5. In Country A each unemployed worker would produce 30,000 cu (currency units) a year. The government pays 6,000 cu in benefits and loses 4,500 cu in tax per person. With 1.1 million unemployed:

Lost output      = 1.1m × 30,000 = 33,000 million cu
Benefits paid    = 1.1m × 6,000  =  6,600 million cu
Tax forgone      = 1.1m × 4,500  =  4,950 million cu
Fiscal cost      = 6,600 + 4,950 = 11,550 million cu

Group	Consequences
Unemployed people	Lower income, poverty, stress, loss of skills, harder to find work as the spell lengthens
Firms	Weaker demand from households with less income; more choice of workers, less wage pressure
Government	Higher benefit spending, lower tax receipts, more spending on social services
The economy	Output below potential (inside the production possibility curve), wasted resources, greater inequality, social problems

Evaluation. The cost depends on type and duration. Frictional unemployment is brief and can match workers to better jobs. Long-term structural unemployment does the most lasting harm. Impact also depends on benefit levels and on whether the unemployed are concentrated in one region.

4.6.1: inflation, deflation and disinflation

Term	Definition
Inflation	A persistent increase in the average level of prices across the economy
Deflation	A persistent decrease in the average level of prices across the economy
Disinflation	Inflation that is still positive but lower than before, so the price level climbs more slowly

One month of higher prices does not make inflation. Disinflation is not deflation, because the price level still rises.

4.6.2: the consumer price index

The CPI measures the change in the cost of a typical household’s spending. A statistics office surveys households to find what they buy, groups it into categories and gives each a weight equal to its share of spending. It collects prices, builds an index for each category with the base year equal to 100, and combines them using the weights.

Worked example 6. In year 0 all indices are 100.

Category	Weight	Index, year 1	Index, year 2
Food	30	108	113
Housing	35	104	108
Transport	15	112	106
Recreation	20	100	103

CPI year 1 = (30×108 + 35×104 + 15×112 + 20×100) ÷ 100 = 105.6
CPI year 2 = (30×113 + 35×108 + 15×106 + 20×103) ÷ 100 = 108.2
Inflation, year 1 = 5.6%
Inflation, year 2 = (108.2 − 105.6) ÷ 105.6 × 100 = 2.5%

Inflation fell from 5.6% to 2.5% while the CPI kept rising: this is disinflation. If the CPI then fell to 107.1, the change would be (107.1 − 108.2) ÷ 108.2 × 100 = −1.0%, which is deflation.

Difficulties. The basket and weights go out of date as habits change. A fixed basket ignores switching to cheaper items. Quality improvements and new products are hard to price. An average household does not exist: pensioners, rural families and high earners buy different baskets. Informal-market prices may be missed.

4.6.3: nominal and real data

Nominal (money) values are measured at the prices of the time. Real values are adjusted for price changes, so they show purchasing power. Real value = nominal value ÷ price index × 100.

Worked example 7. A worker earns 2,400 cu a month in year 0, 2,520 in year 1 and 2,640 in year 2. Use the CPI from example 6.

Real wage year 1 = 2,520 ÷ 105.6 × 100 = 2,386.4 cu   (nominal +5.0%, real −0.6%)
Real wage year 2 = 2,640 ÷ 108.2 × 100 = 2,439.9 cu   (nominal +4.8%, real +2.2%)

Real growth is close to nominal growth minus inflation (5.0 − 5.6 = −0.6). The same method gives real GDP. If nominal GDP rises from 400 to 436 billion cu (+9.0%) while the price index rises to 105.6, real GDP is 436 ÷ 1.056 = 412.9 billion cu, which is real growth of 3.2%.

4.6.4: causes of inflation

	Demand-pull	Cost-push
Starting point	Aggregate demand rises faster than the economy can supply	Costs of production rise
Curve that shifts	AD to the right	SRAS to the left
Effect on output and employment	Output and employment rise (until capacity is reached)	Output and employment fall
Typical causes	Lower taxes, higher consumer confidence, higher government spending, export boom	Higher wages without productivity gains, dearer raw materials or energy, a weaker currency raising import costs, higher indirect taxes

Worked example 8. An invented economy starts with price level 100 and real output 500. In case 1 AD shifts right and the new equilibrium is price level 108 and output 520: demand-pull. In case 2 SRAS shifts left and the equilibrium is price level 108 and output 470: cost-push. Prices rise 8% in both, but output rises in case 1 and falls in case 2. Falling output with rising prices is stagflation.

A wage-price spiral can link the two: higher prices lead workers to demand higher pay, which raises costs and prices again, and so on.

4.6.5: consequences of inflation

Worked example 9. Using the 5.6% inflation of year 1:

Fixed pension of 1,200 cu: real value = 1,200 ÷ 1.056 = 1,136.4 cu (−5.3%)
Savings of 10,000 cu earning 3% (10,300 cu): real value = 10,300 ÷ 1.056 = 9,753.8 cu, a real loss
Debt of 20,000 cu fixed in money terms: real value = 20,000 ÷ 1.056 = 18,939.4 cu, a fall of 1,060.6 cu

• Redistribution. People on fixed incomes and savers whose interest lags prices lose. Borrowers with fixed repayments gain, and lenders lose.
• Menu and shoe-leather costs. Firms reprint prices and households spend time moving money.
• Uncertainty. Unpredictable inflation makes firms delay investment.
• International competitiveness. If Country A’s export prices rise 6% while a rival’s rise 2%, its goods become 106 ÷ 102, or 3.9%, dearer relative to the rival, so exports may fall and imports rise.

Evaluation. The damage depends on the rate and on whether inflation is anticipated. Low, steady inflation is easier to plan around, and wages that rise with prices protect workers. Unexpected, fast inflation does the most harm.

Common errors

• Using the whole population, not the labour force, as the base for the unemployment rate.
• Treating a falling rate as proof that more jobs exist, without checking who left the labour force.
• Calling disinflation a fall in prices.
• Dividing by the new CPI to get the inflation rate instead of by the old one.
• Using the wrong formula for real values: real = nominal ÷ index × 100.
• Drawing cost-push as an AD shift.

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).