GDP, real vs nominal, and GDP per capita

Gross Domestic Product (GDP) is the total value of goods and services produced within a country's borders in a period. (GNI adds net income from abroad — the distinction matters for countries like Ireland, full of foreign-owned firms sending profits home.)

• Nominal GDP is measured at current prices — it rises when prices rise, even if nothing extra is produced. It is close to useless for comparing years.
• Real GDP strips out inflation using the GDP deflator. Only real GDP tells you whether output actually rose.

• GDP per capita = GDP ÷ population. Essential: a country whose GDP grows 2% while its population grows 3% has falling living standards.
• PPP (purchasing power parity) adjusts for the fact that a pound buys far more in Mumbai than in London. Always use PPP-adjusted real GDP per capita for international comparisons.

Volume vs value: volume = real (quantity of stuff). Value = nominal (£ figure). Examiners love the distinction, and it is the same idea as real vs nominal wages.

Your turn — real GDP

Index numbers and the CPI

An index number expresses a value relative to a base year, which is set to 100. If the index is 108, the value is 8% above the base year.

Building the CPI — the Consumer Prices Index measures the average change in the price of a representative basket of goods:

• The Living Costs and Food Survey identifies what households actually buy → a basket of about 700 items.
• Each category is given a weight reflecting its share of household spending (housing and transport have big weights; postage has a tiny one).
• Prices are collected monthly and combined into a weighted price index. The inflation rate is the percentage change in that index over 12 months.

CPI vs RPI: the RPI includes mortgage interest payments and council tax (so it rises when the Bank raises interest rates to fight inflation — perverse) and uses a different averaging formula (the arithmetic mean), which makes the RPI run roughly 1 percentage point higher than the CPI. The CPI is the Bank of England's 2% target measure and is internationally comparable; the RPI is no longer a national statistic but still lurks in rail fares, student loans and index-linked gilts.

Your turn — a weighted price index

Problems with the CPI

• Not representative of everyone. The basket is an average household. Pensioners, students and the very poor have very different spending patterns — the poor spend a much larger share of income on energy and food, so during an energy shock their true inflation rate is far above the headline CPI.
• Quality changes. A phone costs the same as five years ago but does much more. Is that really zero inflation? Hedonic adjustment tries to fix this and is inevitably imperfect.
• Slow to capture new goods and substitution — if beef prices soar, people switch to chicken, but a fixed basket does not notice quickly. The basket is updated annually.
• Excludes housing costs — a serious omission in the UK. (CPIH includes owner-occupiers' housing costs and is the ONS's preferred measure.)
• Sampling and collection errors.

The single most examined application: if nominal wages rise 3% while inflation is 4%, real wages have FALLEN by about 1%. Workers feel poorer despite a pay rise. This is exactly what happened across the UK cost-of-living squeeze.

Your turn — real wages

Real or just nominal?

How unemployment is measured

Two official measures, and AQA expects you to know both and to compare them:

• The Claimant Count — the number of people claiming unemployment-related benefits. Easy and cheap to collect (it is a by-product of administration), available monthly. But it understates true unemployment: it misses people who are seeking work but not eligible to claim (many women returning to work, those with a working partner, under-18s), and it moves whenever the eligibility rules change — so it is a political football.
• The ILO / Labour Force Survey measure — a survey of about 40,000 households. Someone is unemployed if they are out of work, available to start within 2 weeks, and have actively sought work in the last 4 weeks. It is the internationally comparable measure and is normally higher than the Claimant Count. Drawbacks: it is a sample, so it carries sampling error, and it is expensive and slower.

Watch the inactivity rate. Both measures ignore the economically inactive — students, carers, the long-term sick, early retirees. A country can post a beautiful unemployment rate while a huge share of working-age people have simply left the labour market. Post-pandemic Britain is the case study, and it is why the employment rate is often the more honest number.

Your turn — the unemployment rate

Unemployed or inactive?

The current account

The balance of payments records all transactions between UK residents and the rest of the world. AQA focuses on the current account, which has four parts:

• Trade in goods — visible exports minus visible imports. The UK runs a large, persistent deficit here.
• Trade in services — invisibles: finance, insurance, education, tourism, consulting. The UK runs a substantial surplus.
• Primary income — income flows: wages, interest, profits and dividends earned on assets held abroad, minus those paid out to foreign owners of UK assets.
• Secondary income — transfers with nothing given in return: foreign aid, remittances, contributions to international bodies.

Credits are money flowing in (+); debits are money flowing out (−). The current account balance is the sum of all four.

Careful: buying a foreign asset (a factory, shares, bonds) is not a current account item — it belongs in the financial account. The current account records flows of goods, services and income; the financial account records flows of assets. A current account deficit must be financed by a financial account surplus — the UK is, in effect, selling assets or borrowing to pay for its excess imports.

Current account: credit, debit or neither?

Tap a transaction, then tap where it belongs in the UK balance of payments.

GDP, living standards and alternatives

Real GDP per capita is the standard measure of living standards, but it is deeply flawed:

• It ignores the distribution of income — average GDP can soar while the median household stagnates.
• It excludes the informal and black economy, and all unpaid work (childcare, housework, volunteering). Notoriously, GDP falls if you marry your cleaner.
• It ignores externalities: pollution, resource depletion, congestion. Cleaning up an oil spill adds to GDP.
• It says nothing about leisure, working hours, health, inequality or the quality of public services.
• International comparisons need PPP adjustment and are hit by exchange rate swings and differences in data quality.

Alternatives: the Human Development Index (HDI) — a composite of GNI per capita (PPP), life expectancy and education (mean and expected years of schooling), scored 0 to 1. Also: measures of subjective wellbeing (the ONS wellbeing survey, the World Happiness Report), the Gini coefficient, and green measures such as the Genuine Progress Indicator.

Easterlin paradox: above a certain income level, further rises in GDP per capita do very little for measured happiness — relative income and health seem to matter more. Good ammunition for any is economic growth always desirable? question.

Match the measure

Tap a description on the left, then the measure it defines.

Credit or debit?

What GDP misses

The big ideas to know

You have covered the whole of AQA 4.2.1. Press Finish to see your score.