How do economists measure whether an economy is performing well?
Economic growth and real GDP, inflation and its measurement, employment and unemployment, the balance of payments on current account, and the limitations of these indicators.
An Edexcel A-Level Economics A answer to measures of economic performance, covering real and nominal GDP, GDP per capita, the CPI and RPI measures of inflation, the causes of inflation and deflation, the measurement of unemployment, the balance of payments on current account, and the limitations of each indicator.
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What this dot point is asking
Edexcel wants you to define and interpret the four main macroeconomic indicators (growth, inflation, unemployment and the current account), distinguish real from nominal measures, explain how inflation and unemployment are measured, and evaluate the limitations of each indicator.
Economic growth and GDP
GDP is not the same as well-being: it ignores the distribution of income, the hidden (informal) economy, unpaid work and negative externalities, and it values defensive spending (cleaning up pollution) as a positive. Economists also use gross national income (GNI), purchasing-power-parity (PPP) adjustments for cross-country comparison, and subjective well-being data.
Inflation
Inflation can be demand-pull (excess aggregate demand outstripping capacity) or cost-push (rising costs such as wages or imported raw materials), and a money supply growing faster than output also raises prices (the quantity theory). The CPI can overstate inflation because it is slow to capture quality improvements and substitution between goods.
Unemployment and the current account
Unemployment is measured by the Labour Force Survey (the internationally comparable ILO measure, based on a sample survey) and the Claimant Count of those receiving unemployment-related benefits. The Claimant Count usually understates true unemployment because not everyone claims, while the LFS captures discouraged and part-time workers differently. Related concepts include the inactivity rate and underemployment.
The current account of the balance of payments records trade in goods and services, primary income (such as investment income and wages from abroad) and secondary income (transfers like foreign aid). A persistent deficit means a country is spending more on imports of goods, services and income payments than it earns; the UK has run a sustained current account deficit, financed by inflows on the financial account.
Examples in context
- 2022 to 2023 inflation. UK CPI peaked above in October 2022, driven by energy and food (cost-push), the highest in 40 years.
- 2009 deflation scare. UK RPI briefly turned negative in 2009, a rare episode of falling prices during the financial crisis.
- Furlough and unemployment. The 2020 furlough scheme kept measured unemployment far lower than the output collapse implied, a lesson in indicator interpretation.
- UK current account deficit. The UK has run a persistent current account deficit (often to of GDP), reflecting a goods trade deficit partly offset by a services surplus.
Try this
Q1. Distinguish between real and nominal GDP. [3 marks]
- Cue. Nominal is at current prices; real is adjusted for inflation to show the true change in output volume.
Q2. Explain one limitation of using GDP per capita to compare living standards between countries. [4 marks]
- Cue. It ignores income distribution, the hidden economy and non-marketed output, and exchange-rate or price-level differences distort comparisons.
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20184 marksA price index rises from to over a year. Calculate the rate of inflation, and state whether this is inflation, deflation or disinflation if the previous year's rate was .Show worked answer →
A short calculate question on a price index.
Inflation .
Prices are still rising, so it is inflation. Because the rate has fallen from to , this is disinflation (a fall in the rate of inflation, not a fall in prices).
Markers reward (1) the index percentage-change method, (2) , (3) correctly identifying disinflation rather than deflation.
Edexcel 202210 marksExamine the limitations of using GDP per capita to compare living standards between countries.Show worked answer →
A 10 mark examine question (around 7 KAA, 3 evaluation).
KAA: explain that GDP per capita divides output by population but ignores income distribution, the hidden and informal economy, unpaid work, negative externalities and quality-of-life factors, and that exchange-rate conversion can mislead (hence purchasing power parity adjustment).
Evaluation: despite the flaws, GDP per capita correlates strongly with broader well-being measures and is timely and comparable, so it remains useful alongside indicators such as the HDI. Reach a balanced judgement.
Markers reward a developed list of limitations and an evaluative conclusion.
Related dot points
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An Edexcel A-Level Economics A answer to aggregate demand, covering the four components C, I, G and X minus M, the determinants of consumption and investment, the shape of the AD curve and the factors that shift it, and the role of the marginal propensity to consume.
- Actual and potential growth, the causes of short-run and long-run growth, the output gap, the economic cycle, and the costs and benefits of growth.
An Edexcel A-Level Economics A answer to economic growth, covering actual and potential growth, the demand-side and supply-side causes of growth, positive and negative output gaps, the phases of the economic cycle, and the costs and benefits of growth for individuals and the environment.
- The main macroeconomic objectives, fiscal policy, monetary policy, supply-side policies, the conflicts between objectives, and the use of policies in different contexts.
An Edexcel A-Level Economics A answer to macroeconomic objectives and policies, covering the main objectives of growth, low inflation, low unemployment and a stable current account, the tools of fiscal, monetary and supply-side policy, and the conflicts and trade-offs between objectives.
- The circular flow of income, injections and withdrawals, equilibrium real national output, and the multiplier effect.
An Edexcel A-Level Economics A answer to national income and equilibrium, covering the circular flow of income, injections and withdrawals, macroeconomic equilibrium where AD meets AS, and the multiplier effect including the formula based on the marginal propensities.
Sources & how we know this
- Pearson Edexcel A-Level Economics A (9EC0) specification — Pearson Edexcel (2015)