Cambridge IGCSE Economics: Supply-side policy, and measuring economic growth and recession (0455) – Revision Notes

These notes condense sections 4.5 and 4.6.1 to 4.6.3 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 (supply-side policy, measuring growth, recession). Full explanations and worked examples are in the study guide. Test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All figures are invented.

Definitions to learn word for word

Term	Definition
Supply-side policy (4.5.1)	Government action to increase the economy’s productive capacity and the efficiency of its markets, shifting the PPC outwards over time
Economic growth (4.6.1)	Rising output of goods and services across time, usually measured by the percentage change in real GDP
GDP	The total value of goods and services produced in a country in a period
Nominal GDP	GDP at the prices of the year it is measured
Real GDP	GDP adjusted for inflation, using constant prices
GDP per head	GDP divided by population
Recession (4.6.3)	A period when real GDP falls; often two consecutive quarters of falling real GDP

Supply-side measures at a glance (4.5.2)

Measure	What the government does	Mechanism	Main drawback
Education and training	Funds schools, colleges and apprenticeships	Output per worker up; workers more mobile	Slow, costly, skills may not match jobs
Labour market reforms	Weakens barriers to hiring and moving; improves job information	Firms hire more readily; unemployed fill vacancies faster	Job insecurity; lower pay at the bottom
Lower direct taxes	Cuts income tax and corporation tax	Extra work pays more; firms keep more profit to invest	Lower tax revenue; gains skewed to high earners
Deregulation	Removes entry barriers and rules	More competition, lower costs, innovation	Weaker protection of consumers and the environment
Incentives to work and invest	Lower benefits; investment grants; tax allowances	More labour and capital supplied	Hurts people who cannot work; grants cost money
Privatisation	Sells state-owned firms	Profit motive and competition cut waste	Private monopoly; loss of unprofitable services

Method: a chain for any 4-mark explanation

1. Name the measure and what the government does.
2. Say who changes behaviour (workers, firms, consumers).
3. Say what changes in output, productivity or costs.
4. Link to the aim: growth, unemployment, prices, balance of payments or redistribution.

Worked reminder (invented). A firm gets a grant to buy machines, so output per worker rises from 20 to 23 in a week, a rise of (23 − 20) ÷ 20 × 100 = 15%. Capacity has risen, and the PPC can shift out only if the firm also finds buyers.

Effects on macroeconomic aims (4.5.3)

• Growth: more productive resources shift the PPC outwards.
• Unemployment: better skills and flexible labour markets reduce structural unemployment.
• Prices: lower costs and a larger supply ease price pressure.
• Balance of payments: more competitive exports and fewer imports needed.
• Redistribution: education helps; tax and benefit cuts may hurt.
• Evaluation words: time lag, cost, uncertain response, depends on demand.

Tax-cut revenue check (invented). National income is 2 000 million and the tax rate is 25%, so revenue is 500. The rate falls to 20% and income rises to 2 300, so revenue is 460. Revenue would stay at 500 only if income reached 500 ÷ 0.20 = 2 500.

Measuring growth (4.6.2)

Calculation	Formula
Real GDP	(nominal GDP ÷ price index) × 100
Growth rate	(new − old) ÷ old × 100
GDP per head	GDP ÷ population
Real GDP per head growth	Compare real GDP ÷ population in the two years

Method: finding real growth

1. Divide each year’s nominal GDP by its price index and multiply by 100.
2. Use the base year’s own figure unchanged.
3. Find the percentage change in the two real figures.

Worked reminder (Country M, invented). Nominal GDP is 960 and then 1 008; the price index goes from 100 to 108. Nominal growth is 5.0%. Real GDP in the second year = 1 008 ÷ 108 × 100 = 933.3. Real growth = (933.3 − 960) ÷ 960 × 100 = −2.8%. Output fell even though the nominal figure rose.

Must-know distinction: real GDP growth shows output change; GDP per head growth also needs population. When population grows faster than output, GDP per head falls.

Limits of GDP per head: an average that hides inequality, leaves out unpaid and informal work, ignores pollution, and says nothing about quality of life.

Recession (4.6.3)

• Causes: falling consumer or investment spending, weaker exports, higher interest rates, tight credit, cuts in government spending, a rise in key input prices.
• Consequences: rising unemployment, failing firms, lower incomes, lower tax revenue and higher benefit spending, slower price rises, more poverty.
• PPC: a recession moves the economy from a point on the curve to a point inside it. The curve stays where it is, because the resources still exist. They are unemployed or underused.
• Recovery moves the economy back towards the PPC. Growth in potential output shifts the curve outwards, which is a separate event.

Event	PPC picture
Recession	Move from a point on the PPC to a point inside it
Recovery	Move from inside back towards the PPC
Supply-side success	PPC shifts outwards
Long recession scarring skills and capital	PPC may shift inwards

Must-know distinctions

• Supply-side policy versus demand-side policy: supply-side policy works on capacity and costs over years; fiscal and monetary policy work on spending, usually faster.
• Direct versus indirect taxes: lower direct taxes (on income and profit) are the supply-side measure. Taxes on spending are not.
• Deregulation versus privatisation: deregulation removes rules. Privatisation changes who owns an enterprise.
• Real versus nominal: only real GDP removes the effect of price changes.
• Total versus per head: a larger economy is not always a richer one per person.
• Recession versus slow growth: in a recession real GDP falls. Slow growth is still positive growth.
• Cyclical versus structural unemployment: a recession causes cyclical unemployment, which supply-side measures do little to cure. Training addresses structural unemployment.

Evaluation checklist for supply-side questions

• Time: how long before output responds?
• Cost: what does it cost the government, and what does it give up?
• Size of response: will people actually change behaviour?
• Who gains and loses: workers, firms, consumers, taxpayers, the poor.
• Demand: is there enough spending to buy the extra output?
• Conclusion: give a judgement that rests on a named condition, for example “this works best when skills shortages are the main problem”.

Worked reminder: per head (Country C, invented). Real GDP rises from 1 200 to 1 260 billion (up 5.0%) and population from 60 to 63 million (up 5.0%). GDP per head is 20 000 both years, so there is no gain for the average person even though output grew.

Quick self-test

1. Define supply-side policy.
2. Name the six supply-side measures in the syllabus.
3. Nominal GDP is 1 500 and the price index is 125. Find real GDP.
4. Real GDP per head rises from 12 000 to 12 360. Find the percentage growth.
5. Real GDP per head is 18 000 and population is 25 million. Find real GDP.
6. Real GDP by quarter is 300, 297 and 294. Is this a recession by the two-quarter rule, and what is the fall from the first quarter?
7. Give two reasons a cut in income tax might not raise output.
8. Give one benefit and one risk of privatisation.
9. A recession is a movement within the PPC. Where does the economy move?
10. Why can real GDP growth of 3% coexist with falling GDP per head?

Answers

1. Government action to raise productive capacity and market efficiency, so the PPC shifts outwards.
2. Education and training, labour market reforms, lower direct taxes, deregulation, improved incentives to work and invest, privatisation.
3. 1 500 ÷ 125 × 100 = 1 200.
4. (12 360 − 12 000) ÷ 12 000 × 100 = 3.0%.
5. 18 000 × 25 million = 450 billion (450 000 million).
6. Falls of 1.0% and 1.0%, so yes. The fall from the first quarter is (294 − 300) ÷ 300 × 100 = −2.0%.
7. Some people may work fewer hours because the same income needs less effort; and weak demand may mean firms do not need extra output.
8. Benefit: competition and the profit motive cut waste. Risk: a private monopoly raises prices.
9. From a point on the curve to a point inside it.
10. Population may be growing faster than 3%, so output per person falls.

Where marks are usually lost

• Using nominal GDP when the question asks for growth in output.
• Forgetting to multiply by 100 when applying a price index.
• Naming a supply-side measure with no mechanism.
• Saying a measure “always” works, with no time lag or cost.
• Describing a recession as a shift of the curve instead of a move inside it.
• Giving a total GDP figure when asked for GDP per head.
• Leaving out the evaluation: who gains, who loses and how long it takes.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 4.5 Supply-side policy and 4.6 Economic growth (4.6.1 to 4.6.3).