AQA A-Level Economics (7136) · The National & International Economy
Specification points
- The measurement of economic growth; real and nominal GDP, GDP per capita.
- The economic cycle and the output gap.
- The costs and benefits of growth.
Measuring growth
GDP is total output. Real GDP is adjusted for inflation; nominal is not. GDP per capita divides by population as a guide to living standards. National income statistics are useful but omit inequality, the informal economy, environmental costs and non-market activity.
The economic cycle
The economic (business) cycle shows fluctuations of actual output around the trend: boom, downturn, recession, recovery. The output gap is the difference between actual and trend output:
- Positive output gap — above trend → inflationary pressure.
- Negative output gap — below trend → spare capacity and unemployment.
Key definitions
| Term | Definition |
|---|---|
| Real GDP | GDP adjusted for inflation. |
| Output gap | The difference between actual and trend (potential) output. |
| Recession | A fall in real GDP over two consecutive quarters. |
Costs and benefits of growth
| Benefits | Costs |
|---|---|
| Higher incomes and living standards | Demand-pull inflation |
| More employment | Environmental damage; resource depletion |
| More tax revenue | Inequality may widen |
Sustainable growth raises living standards; unsustainable growth risks inflation and environmental harm.
Worked example
Nominal GDP grows 4% while inflation is 2%, so real growth is about 2%. If this exceeds the growth of productive capacity, a positive output gap opens and inflation rises — showing why the *sustainability* of growth matters.
Common exam mistakes
- Confusing real and nominal GDP.
- Getting the output gap sign wrong.
- Treating GDP as a complete welfare measure.
Exam technique
Calculate real growth from data, use the output gap to judge inflationary pressure, and evaluate growth by its sustainability and distribution.
Quick revision
- Real GDP ≈ nominal − inflation.
- Cycle: boom, downturn, recession, recovery.
- Positive output gap → inflation; negative → spare capacity.