This mini-lesson walks you through the core of AQA Paper 2 — How the Economy Works: the four main macroeconomic objectives, how we measure the economy with GDP and inflation (CPI), how the government uses fiscal policy and the Bank of England uses monetary policy, the role of money & banks, and globalisation & international trade.
Work through each screen, answer the questions as you go (some are wordy, some are calculations like growth rates or inflation) and collect ⭐ stars. Press Start when you're ready.
Macroeconomic objectives
The four main economic objectives
Governments try to manage the whole economy to meet four main macroeconomic objectives:
Economic growth — a steady rise in real GDP (the total output of goods and services).
Low unemployment (full employment) — as many people as possible who want work are in work.
Low and stable inflation — prices rising slowly and predictably (the UK target is 2% CPI).
A healthy balance of payments — a sustainable position on the current account (trade in goods & services with the rest of the world).
Watch out: these objectives can conflict. For example, fast growth can pull inflation up, and cutting inflation with high interest rates can slow growth and raise unemployment.
Measuring the economy · GDP
GDP & economic growth
GDP (Gross Domestic Product) is the total value of goods and services produced in a country in a year. Economic growth is a rise in real GDP, measured as a percentage change from one year to the next.
economic growth = change in real GDP ÷ old real GDP × 100real GDP has been adjusted for inflation, so it shows a true change in output
Real GDP adjusts for inflation — it strips out price rises so you can see whether output actually grew.
Nominal GDP uses current prices, so it can rise just because prices rose.
Rising real GDP usually means more jobs, higher incomes and better living standards.
Example: if real GDP rises from £500bn to £510bn, growth = (510 − 500) ÷ 500 × 100 = 2%.
Quick check
What does GDP measure?
?Which of these is the best definition of a country's GDP?
Calculate
Your turn — growth rate
1A country's real GDP rises from £500bn to £515bn in a year. Calculate the economic growth rate (% change).
% growth
Hint: growth = (515 − 500) ÷ 500 × 100.
Measuring the economy · inflation
Inflation & the CPI
Inflation is a sustained rise in the general price level — money buys less over time. In the UK it is measured by the CPI (Consumer Prices Index).
The CPI tracks the price of a representative "basket" of goods and services that a typical household buys.
The basket is turned into an index number (a base year is set to 100); the % change in the index is the inflation rate.
The UK government's inflation target is 2%, kept on track by the Bank of England.
Worked example
A price index rises from 100 to 104 over the year.
inflation = (104 − 100) ÷ 100 × 100 = 4%.
Calculate
Your turn — inflation
2A price index rises from 100 last year to 105 this year. Calculate the rate of inflation (%).
% inflation
Hint: inflation = (105 − 100) ÷ 100 × 100.
Government policy
Fiscal & monetary policy
Governments and central banks steer the economy using two main tools:
Fiscal = government spending & taxation · Monetary = interest rates set by the central bank.
Fiscal policy — the government uses spending and taxation. Taxes split into direct taxes (e.g. income tax, on income/wealth) and indirect taxes (e.g. VAT, on spending).
Monetary policy — the Bank of England (the central bank) changes interest rates (and the money supply). Raising interest rates makes borrowing dearer, so spending falls and inflation tends to come down.
Watch out: only the central bank sets interest rates — that's monetary policy. Anything the government does with spending or taxes is fiscal policy.
Quick check
Fiscal or monetary?
?Which of these is an example of MONETARY policy?
Sort it
Fiscal, monetary or an objective?
Tap a term, then tap whether it is a fiscal policy tool, a monetary policy tool, or one of the macroeconomic objectives.
🏦 Fiscal policy
💷 Monetary policy
🎯 An objective
Money & banks
The role of money & banks
Money makes exchange far easier than barter. Economists say money has three main functions:
Medium of exchange — it is accepted in return for goods and services.
Store of value — you can save it now and spend it later.
Unit of account — it gives everything a common price so values can be compared.
Banks keep the economy running by:
Accepting deposits (a safe place to save).
Lending to households and firms (loans, mortgages, overdrafts).
Allowing payments (cards, transfers) so money moves easily.
Link it up: because banks lend, changes in interest rates (monetary policy) feed straight through to how much people borrow and spend.
Globalisation & international trade
Globalisation & international trade
Globalisation is the growing links between countries through trade, investment and technology. Countries trade because of specialisation — each concentrates on what it produces relatively best (its comparative advantage) and swaps for the rest.
Exports — goods and services sold abroad. Exports bring money IN to a country.
Imports — goods and services bought from abroad. Imports send money OUT of a country.
The difference between them is the trade balance: a surplus if exports > imports, a deficit if imports > exports.
Benefits & costs: trade gives consumers more choice and lower prices, and lets firms sell to bigger markets — but it can expose domestic industries to tough foreign competition.
Calculate
Your turn — trade balance
3A country exports £80bn of goods and imports £95bn of goods. Calculate the trade balance in goods (exports − imports), in £bn. Give a negative number if it is a deficit.