The main macroeconomic objectives, the use of GDP and real and nominal values, index numbers, and other indicators of living standards and well-being.

What this dot point is asking

AQA wants you to identify the main macroeconomic objectives, explain the use of GDP and the difference between real and nominal values, use index numbers, and discuss other indicators of living standards and well-being. The real-versus-nominal calculation and the limitations of GDP recur every year.

Macroeconomic objectives

These objectives can conflict, which is the basis of much evaluation. Fast growth may raise inflation and pull in imports, worsening the balance of payments; cutting a deficit through austerity may raise unemployment. Policy therefore involves trade-offs, and the appropriate priority depends on the position in the cycle.

GDP and real versus nominal values

Only real changes show genuine growth: if nominal GDP rises 5 percent but prices rise 5 percent, real GDP is unchanged. To convert nominal to real, divide by a price index (the GDP deflator) and multiply by 100. GDP per capita (GDP divided by population) is needed to compare living standards, because total GDP can rise simply because the population grew. International comparisons use purchasing power parity to adjust for differences in the cost of living.

Index numbers

Index numbers make it easy to compare changes over time and are used for the price level (CPI), real GDP and many other series. To find the percentage change between two index values, apply $\frac{\text{new} - \text{old}}{\text{old}} \times 100$. An index of 120 means a 20 percent rise from the base, not a value of 120 percent.

Indicators of living standards

GDP per capita is the standard measure of average living standards, but it ignores the distribution of income, the informal economy and non-marketed activity (such as unpaid care), leisure time, and the environment and quality of public services. Wider measures include the Human Development Index (income, education and health), measures of subjective well-being (happiness) such as the ONS well-being survey, and indicators of income inequality such as the Gini coefficient. A balanced answer uses several indicators rather than GDP alone.