OCR A Level Economics: Economic growth, GDP and recession (H460) – Revision Notes

These notes condense the growth part of Economic growth and development in Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Fuller explanations are in the study guide; test yourself with the practice questions. Also see the OCR Economics hub, the printable checklist and the free 10-minute diagnostics. Data are invented and illustrative.

Key definitions

Term	Meaning
Primary sector	Extracting or harvesting natural resources (farming, fishing, mining)
Secondary sector	Making goods from materials (manufacturing, construction)
Tertiary sector	Services (retail, finance, education, transport)
Structure of an economy	How output and employment divide between the three sectors
Economic growth	More output over time, usually shown by the percentage rise in real GDP
Sustained growth	Growth that continues over a long period without being cut short by instability
Sustainable growth	Growth that does not damage the environment or deplete resources future generations need
Sustainable development	Development that satisfies today’s needs while leaving later generations able to meet theirs
Recession	A fall in real output; commonly two quarters in a row of falling real GDP
Nominal (money) GDP	Output valued at the prices of the time
Real GDP	Output valued at constant (base-year) prices
Actual growth	Rise in actual output, using spare capacity
Potential growth	Rise in capacity (LRAS or the PPF/C shifts outwards)

Formulas

Measure	Formula
Growth rate (%)	(new - old) / old x 100
Real GDP	nominal GDP / price index x 100
Real growth rate	growth rate of real GDP, calculated from real values
GDP per capita	GDP / population

Method: real growth in four steps

1. Choose the base year (index 100).
2. Deflate each nominal value: nominal / index x 100.
3. Find the percentage change between the real values.
4. Say what it means (real output rose or fell, not “money” output).

Worked reminder: Country E (illustrative)

Nominal GDP is 2,200 in 2022 (index 100) and 2,310 in 2023 (index 104). Population is 40.0 million and 40.2 million.

• Nominal growth = 110 / 2,200 = 5.0%.
• Real GDP 2023 = 2,310 / 104 x 100 = 2,221.15.
• Real growth = 21.15 / 2,200 = 0.96% (rounded; 5% minus 4% of price rise gives about 1%).
• Real GDP per capita 2022 = 2,200 billion / 40.0 million = 55,000.
• Real GDP per capita 2023 = 2,221.15 billion / 40.2 million = 55,252.58.
• Per capita growth = 0.46%, below real growth because population rose by 0.5%.

Worked reminder: growth over several years

Real growth of 1.5%, then 2.0%, then -0.5%. Do not add. Multiply the factors: 1.015 x 1.02 x 0.995 = 1.0301, so cumulative growth is 3.01%.

Worked reminder: nominal up, real down

Country A: nominal GDP rises 4.5% while the price index rises 6%. Real growth = 1.045 / 1.06 - 1 = -1.42%. The headline rose but real output fell, so this is not growth.

Rebasing

Nominal GDP 1,710 with a price index of 114 (base year 100): real GDP = 1,710 / 114 x 100 = 1,500.

Short run and long run growth

	Short run	Long run
What changes	Actual output	Potential output
Curve	AD shifts right (SRAS fixed)	LRAS shifts right (and usually SRAS)
PPF/C	Point inside the curve moves out to it	Curve itself moves outwards
Typical causes	Consumption, investment, government spending, net exports	Capital, human capital, technology, resources, labour supply, institutions
Limit	Capacity runs out; inflation risk	Slow; needs investment and time

Plot price level vertically and real output horizontally. AD rising along an upward-sloping SRAS lifts output and prices. If the economy is already at the vertical LRAS, the shift gives only inflation. Long-run growth moves LRAS right, so full-capacity output rises.

Worked reminder: actual and potential growth

Country G has potential output 800 and actual output 760.

• If actual output rises to 784, short-run growth = 24 / 760 = 3.16%. Spare capacity falls from 40 to 16.
• If potential output then rises 3% to 824, long-run growth has occurred, and spare capacity is back to 824 - 784 = 40.

Lesson: short-run growth uses up spare capacity; long-run growth creates more.

Worked reminder: recession check

Real GDP index: 100.0, then falls 0.3% and falls a further 0.6%, then rises 0.5%. Levels: 100.0 x 0.997 = 99.70, then 99.70 x 0.994 = 99.10, then 99.10 x 1.005 = 99.60. Two consecutive falls meet the usual rule, yet output is still 0.4% below its start after the rebound.

Why GDP is measured, and its limits

• Why: track output and living standards, compare countries and periods, judge spare capacity, guide policy.
• How: output (value added), income, or expenditure; in principle these give the same total.
• Difficulties: informal economy, unpaid work, quality improvements, externalities and clean-up spending counted as output, price index error, exchange rates and price-level differences between countries, revisions, no information on distribution.
• Direction matters: informal and unpaid work means understated GDP; clean-up spending after damage means overstated welfare.

Causes of growth: evaluation points

• Investment raises both demand now and capacity later, but depends on confidence, interest rates and returns.
• Education and training raise productivity, but take years to pay back and need matching jobs.
• Technology gives the largest long-run gains, but is uncertain and can displace workers.
• Net exports boost demand but depend on foreign income and competitiveness.
• Consumer spending is the largest part of demand in many economies, but if funded by borrowing it may not last.
• Strong answers link cause to curve (AD or LRAS), explain the chain, and judge importance in the context given.

Costs and benefits of growth: evaluation checklist

Benefits	Costs
Living standards, jobs, tax revenue	Environmental harm, depletion
Funds public services and poverty reduction	Inequality, regional imbalance
Lower debt relative to GDP	Inflation and trade deficit if demand outstrips capacity
Choice, opportunity	Structural unemployment, congestion

Judge by: type of growth, speed, who gains, sustainability, timescale and policy response.

Consequences of a recession: chain of reasoning

Falling demand → lower output → firms cut jobs → unemployment rises → incomes and spending fall → profits and tax revenue fall → welfare spending rises → deficit widens. Investment cut → capacity grows less → long-run damage (“scarring”). Judge by depth, length, cause, starting point and policy response.

Growth, structure and sustainable development

• Growth tends to move economies from primary to secondary then tertiary output.
• Structural change can help sustainable development (cleaner services, higher productivity) or hurt it (resource extraction, pollution moved abroad, unemployment in declining sectors).
• Evaluate: what drives the growth, what is done with the income, who benefits, and whether natural capital is protected.

Must-know distinctions

• Nominal versus real: only real removes price changes.
• Real GDP versus real GDP per capita: population growth separates them.
• Sustained versus sustainable: time versus environment and future generations.
• Actual versus potential growth: using capacity versus creating it.
• Recession versus slowdown: falling versus slower-rising output.

Quick self-test

1. Classify a dairy farm, a car plant and a call centre by sector.
2. Distinguish sustained growth from sustainable growth.
3. Nominal GDP is 468 and the price index is 120 (base year 100). Calculate real GDP.
4. Nominal GDP rises 5% and the price index rises 8%. Calculate real growth to two decimal places.
5. GDP is 800 billion and population is 25 million. Calculate GDP per capita.
6. Real GDP of 600 grows 2.5% a year. Calculate real GDP after two years.
7. GDP per capita rises from 12,000 to 12,360. Calculate the percentage growth.
8. Quarterly real growth is +0.3%, -0.4%, -0.2%, +0.1%. Is the economy in recession by the usual definition?
9. Which shifts LRAS: a cut in consumer taxes or a rise in apprenticeships?
10. Give one reason why GDP may understate economic welfare and one why it may overstate it.

Answers

1. Dairy farm: primary. Car plant: secondary. Call centre: tertiary.
2. Sustained: lasts a long time without instability. Sustainable: does not damage the environment or compromise future generations.
3. 468 / 120 x 100 = 390.
4. 1.05 / 1.08 - 1 = -2.78%.
5. 800,000 million / 25 million = 32,000.
6. 600 x 1.025 x 1.025 = 630.38.
7. 360 / 12,000 = 3.0%.
8. Yes. The two consecutive negative quarters (-0.4%, -0.2%) meet the usual convention, though growth returned to positive in the fourth quarter.
9. The rise in apprenticeships (human capital). Tax cuts shift AD.
10. Understates: unpaid work or the informal economy is missed. Overstates: spending on repairing pollution damage counts as output without raising welfare.

Where marks are usually lost

• Quoting money figures when the question is about growth in output.
• Dividing by the wrong year’s price index, or by the index as a decimal and forgetting to multiply by 100.
• Adding annual growth rates rather than compounding them.
• Stating a definition of sustainable growth that only says “growth that lasts”.
• Listing measurement problems without saying which way GDP is biased.
• Drawing AD/AS with no named axes or equilibrium points.
• Describing costs and benefits of growth without a judgement about which dominates and why.
• Writing about the recession in general terms rather than chaining cause to effect.

Official syllabus

These notes follow the OCR A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, published by OCR (Oxford Cambridge and RSA Examinations).