Measuring economic activity

GDP (gross domestic product) is the total value of all final goods and services produced within a country in a year. In the circular flow, three measures are equal:

Using the expenditure approach:

Careful: imports (M) are subtracted because they are produced abroad, not domestically.

Your turn — GDP

Nominal vs real GDP

Nominal GDP is measured at current prices; real GDP removes the effect of inflation so we can compare output over time. We convert using the GDP deflator (a price index, base year = 100):

Your turn — real GDP

Aggregate demand and aggregate supply

Aggregate demand (AD) is total planned spending on domestic output at each price level: AD = C + I + G + (X − M). It slopes downward. Aggregate supply (AS) is total output firms produce.

What shifts AD: changes in consumer/business confidence, interest rates, government spending, taxes, or net exports.

Cutting interest rates

Inflation and the CPI

Inflation is a sustained rise in the general price level; it is measured by the percentage change in a consumer price index (CPI) — a weighted basket of goods.

• Demand-pull inflation — AD rises faster than AS.
• Cost-push inflation — higher production costs (e.g. wages, oil) shift AS left.

Deflation (falling prices) and disinflation (slowing inflation) are different — do not confuse them.

Your turn — inflation rate

Which kind of inflation?

Unemployment

The unemployed are people of working age who are without work but actively seeking it. The labour force = the employed + the unemployed.

• Cyclical — caused by a fall in AD in a downturn.
• Structural — skills or location mismatch as industries change.
• Frictional — short-term, between jobs.

Your turn — unemployment rate

Which type of policy?

Tap a policy, then tap its category.

Economic growth & the business cycle

Economic growth is an increase in real GDP over time. Actual growth uses spare capacity (moving from inside the PPC toward it); potential growth shifts the PPC outward as productive capacity rises.

Real GDP fluctuates around a long-run trend in the business cycle: expansion → peak → contraction → trough.

Growth vs development: growth is about output; development is a broader rise in living standards (health, education, freedoms).

Using spare capacity

Distribution of income & equity

Markets can produce large inequalities. Economists measure inequality with the Lorenz curve and the Gini coefficient (0 = perfect equality, 1 = maximum inequality).

Governments promote equity through:

• Progressive taxes — higher earners pay a larger share of income.
• Transfer payments — benefits, pensions, unemployment support.
• Provision of merit goods (health, education).

Key concept — equity vs efficiency: redistribution can improve fairness but may weaken work or investment incentives — a classic trade-off.

Match each indicator to its definition

Tap a definition on the left, then the indicator on the right.

Demand-side, supply-side and the multiplier

• Demand-side policies manage AD: fiscal (government spending & taxes) and monetary (interest rates & money supply).
• Supply-side policies raise productive capacity (education, infrastructure, competition, incentives).

An initial injection into the circular flow creates further rounds of spending — the multiplier effect:

Your turn — the multiplier

Name the policy type

The big ideas to know

You have covered the core of IB Macroeconomics. Press Finish to see your score.