Complete Definition Masterlist

#Pearson Edexcel IAL Economics WEC12/01

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#HOW TO USE THIS

Every definition uses the exact two-component structure:

Mark 1 = Core concept — what the term fundamentally is. Mark 2 = Qualifying component — what distinguishes this term from similar terms.

Write two sentences. Stop. Everything beyond that earns zero.

The circular definition trap: Never use the term being defined to define itself. "Real GDP is GDP measured in real terms" — the qualifier "real terms" uses the word being defined. Zero marks for Mark 2.

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#SECTION 1 — GDP AND GROWTH

GDP (Gross Domestic Product) Mark 1: The total value of all goods and services produced within a country's borders in a given period Mark 2: Measured annually or quarterly / the sum of consumption (C) + investment (I) + government spending (G) + net exports (X−M) Model answer: "GDP is the total value of all goods and services produced within an economy's borders in a given time period, comprising consumption, investment, government expenditure, and net exports."

Real GDP Mark 1: The total value of goods and services produced in an economy Mark 2: Adjusted for inflation / measured at constant prices / with the effect of price changes removed TRAP: "Real GDP is GDP in real terms" — circular, Mark 2 = zero. Model answer: "Real GDP is the total value of goods and services produced in an economy, adjusted for inflation to remove the effect of price changes."

GDP per capita Mark 1: A country's total GDP Mark 2: Divided by the population / the average output or income per person Model answer: "GDP per capita is a country's total GDP divided by its population, measuring the average level of output or income per person."

GDP growth rate Mark 1: The annual percentage change in real GDP Mark 2: Measuring how quickly the economy's total output is expanding or contracting Model answer: "The GDP growth rate is the annual percentage change in real GDP, measuring the rate at which an economy's total output is expanding or contracting."

GNP / GNI (Gross National Product / Income) Mark 1: The total income earned by a country's residents Mark 2: Including income from overseas assets and investments, regardless of where production occurs — different from GDP which measures domestic production Model answer: "GNP/GNI is the total income earned by a country's residents, including returns on overseas investments, regardless of where production occurs."

Economic growth Mark 1: An increase in real GDP / the real output of an economy Mark 2: Actual growth = real GDP rising; Potential growth = LRAS shifting rightward / increase in productive capacity Model answer: "Economic growth is an increase in an economy's real GDP over time (actual growth) or an increase in its productive potential (potential growth), shown by an outward shift of the LRAS curve."

Recession Mark 1: A period of negative economic growth / falling real GDP Mark 2: Occurring in two or more consecutive quarters TRAP: "Going down" or "shrinking" risks losing Mark 1. Use "negative real GDP growth." Model answer: "A recession is a period of two or more consecutive quarters of negative real GDP growth."

Depression Mark 1: A prolonged and severe recession Mark 2: Typically defined as a decline in GDP of more than 10% or lasting more than 2 years Model answer: "A depression is a prolonged and severe economic contraction — typically a decline in GDP of more than 10% or lasting more than two years."

Output gap Mark 1: The difference between actual output and potential output (full employment output) Mark 2: Positive when actual > potential (demand-pull inflationary pressure); negative when actual < potential (spare capacity and unemployment) Model answer: "An output gap is the difference between an economy's actual real GDP and its potential output — positive when actual output exceeds productive capacity, negative when spare capacity exists."

Productivity Mark 1: Output per unit of input / output per worker per hour Mark 2: Measuring the efficiency with which inputs are converted to outputs Model answer: "Productivity measures output per unit of input — typically labour productivity, calculated as output per worker per hour, indicating how efficiently inputs are converted to goods and services."

Multiplier Mark 1: The ratio of the change in national income to an initial change in injections into the circular flow Mark 2: Equal to 1/(1−MPC) or 1/MPW — showing by how much national income rises for every £1 of additional injection Model answer: "The multiplier is the ratio by which national income changes for every £1 of additional injection into the circular flow, equal to 1/(1−MPC)."

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#SECTION 2 — INFLATION AND PRICE LEVEL

Inflation Mark 1: A sustained rise in the general price level Mark 2: Measured by the annual percentage change in the Consumer Price Index (CPI) / causing a fall in the purchasing power of money TRAP: "Prices going up" — lacks "sustained" and "general." Risk losing Mark 1. Model answer: "Inflation is a sustained rise in the general price level, measured by the annual percentage change in the Consumer Price Index (CPI)."

Disinflation Mark 1: A fall in the rate of inflation Mark 2: The general price level is still rising but at a slower rate than before / the CPI inflation rate is decelerating CRITICAL DISTINCTION: Prices still RISE during disinflation. They fall only in deflation. Model answer: "Disinflation is a fall in the rate of inflation — the general price level is still rising but at a decelerating rate."

Deflation Mark 1: A sustained fall in the general price level Mark 2: A negative rate of inflation / CPI below zero CRITICAL DISTINCTION: Distinguished from disinflation — prices must actually fall, not just rise more slowly. Model answer: "Deflation is a sustained fall in the general price level, characterised by a negative rate of CPI inflation."

Demand-pull inflation Mark 1: Inflation caused by excess aggregate demand relative to productive capacity Mark 2: When actual output exceeds potential output / a positive output gap / AD growing faster than AS Model answer: "Demand-pull inflation occurs when excess aggregate demand relative to productive capacity pulls up the general price level — typically when the economy is operating beyond its full employment level."

Cost-push inflation Mark 1: Inflation caused by rising production costs Mark 2: Shifting SRAS leftward / simultaneously raising the price level and reducing real output (stagflation) Model answer: "Cost-push inflation arises when rising production costs shift the SRAS curve leftward, simultaneously increasing the price level and reducing real output — potentially creating stagflation."

CPI (Consumer Price Index) Mark 1: A measure of the average change in prices of a weighted basket of goods and services Mark 2: Purchased by a typical household / used to measure the rate of inflation Model answer: "The CPI measures the average price change of a weighted basket of goods and services representing typical household expenditure, used to calculate the rate of inflation."

Inflation target Mark 1: A rate of inflation set by the government (or agreed with the central bank) as a policy objective Mark 2: Used to guide monetary policy decisions and provide price stability / in the UK, 2% CPI with a 1pp tolerance band Model answer: "An inflation target is a government-set rate of inflation that the central bank is mandated to achieve through monetary policy, providing a public anchor for price stability expectations."

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#SECTION 3 — UNEMPLOYMENT

Unemployment (ILO definition) Mark 1: People of working age who are without paid employment Mark 2: But are actively seeking work and available to start / measured by the ILO Labour Force Survey Model answer: "Unemployment (ILO definition) refers to those of working age without paid employment who are actively seeking work and available to start, measured by the ILO Labour Force Survey."

Cyclical unemployment (demand-deficient) Mark 1: Unemployment caused by a fall in aggregate demand Mark 2: Associated with the downswing of the economic cycle / also called demand-deficient unemployment / falls when AD recovers Model answer: "Cyclical (demand-deficient) unemployment arises when a fall in aggregate demand reduces firms' output, causing labour to be shed — it rises in recessions and falls during recoveries."

Structural unemployment Mark 1: Long-term unemployment caused by a mismatch between workers' skills and employer requirements Mark 2: Resulting from industrial restructuring, technological change, or deindustrialisation Model answer: "Structural unemployment arises from a skills mismatch between unemployed workers and available vacancies, caused by shifts in the composition of economic activity or technological displacement."

Frictional unemployment Mark 1: Short-term unemployment occurring when workers move between jobs Mark 2: The time taken to search for and match with suitable vacancies / always present even in healthy labour markets Model answer: "Frictional unemployment is the short-term unemployment arising from the time workers spend searching for and matching with suitable employment between jobs."

Seasonal unemployment Mark 1: Unemployment caused by seasonal fluctuations in demand for labour Mark 2: Affecting industries such as agriculture, tourism, or retail where demand varies predictably by season Model answer: "Seasonal unemployment arises from predictable seasonal variations in labour demand — affecting workers in industries such as agriculture, tourism, and construction where activity is weather or calendar-dependent."

Natural rate of unemployment (NAIRU) Mark 1: The rate of unemployment consistent with stable inflation / when the labour market is in equilibrium Mark 2: Comprising frictional and structural unemployment but excluding cyclical / the lowest rate achievable without accelerating inflation Model answer: "The natural rate of unemployment (NAIRU) is the equilibrium unemployment rate consistent with stable inflation, comprising frictional and structural unemployment but excluding demand-deficient cyclical unemployment."

Underemployment Mark 1: When workers are employed in positions that do not fully utilise their skills, qualifications, or desired working hours Mark 2: Including part-time workers seeking full-time employment and graduates in low-skill roles Model answer: "Underemployment occurs when employed workers are in positions that underutilise their skills or offer fewer hours than desired, failing to capture their full productive contribution."

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#SECTION 4 — AGGREGATE DEMAND AND SUPPLY

Aggregate Demand (AD) Mark 1: The total planned expenditure on goods and services in an economy at a given price level Mark 2: Comprising C + I + G + (X−M) / downward sloping due to real balance, interest rate, and international trade effects Model answer: "Aggregate demand is the total planned expenditure on goods and services in an economy at a given price level, equal to consumption (C) + investment (I) + government expenditure (G) + net exports (X−M)."

Aggregate Supply (SRAS) Mark 1: The total output that firms in an economy are willing and able to supply at a given price level in the short run Mark 2: Upward sloping because higher prices justify higher production even at the same factor costs Model answer: "Short-run aggregate supply is the total output firms are willing and able to produce at a given price level in the short run, upward sloping as higher prices incentivise greater production."

Long-Run Aggregate Supply (LRAS) Mark 1: The total output an economy can produce when all factors of production are fully and efficiently employed Mark 2: Vertical at the full employment level of output / determined by supply-side factors not the price level Model answer: "Long-run aggregate supply represents the economy's maximum productive potential when all factors are fully employed — vertical at the full employment output (Yfe) and independent of the price level."

Full employment output (Yfe) Mark 1: The level of real output at which all factors of production are fully and efficiently employed Mark 2: Where actual output equals potential output / the economy is on the LRAS curve Model answer: "Full employment output (Yfe) is the level of real GDP at which all factors of production are fully and efficiently employed, corresponding to the position of the LRAS curve."

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#SECTION 5 — BALANCE OF PAYMENTS

Current account Mark 1: The section of the balance of payments recording flows of goods, services, income, and current transfers Mark 2: A surplus = more receipts than payments; a deficit = more payments than receipts Model answer: "The current account records flows of goods, services, investment income, and current transfers between a country and the rest of the world — in surplus when receipts exceed payments, in deficit when payments exceed receipts."

Current account deficit Mark 1: When a country's payments on the current account exceed its receipts Mark 2: Meaning imports of goods, services, and income transfers exceed exports / a net outflow requiring capital account financing Model answer: "A current account deficit occurs when a country's payments for imports of goods, services, and income transfers exceed its receipts from exports — requiring a surplus on the capital/financial account to finance."

Balance of payments Mark 1: A record of all economic transactions between a country and the rest of the world Mark 2: Comprising the current account, capital account, and financial account / must always sum to zero in accounting terms Model answer: "The balance of payments is a systematic record of all economic transactions between a country and the rest of the world over a given period, comprising the current, capital, and financial accounts."

Exchange rate Mark 1: The price of one currency expressed in terms of another Mark 2: Determined by the supply and demand for that currency in the foreign exchange market Model answer: "The exchange rate is the price of one currency expressed in terms of another, determined by the supply and demand for currencies in the foreign exchange market."

Marshall-Lerner condition Mark 1: The condition under which a currency depreciation will improve the current account Mark 2: The sum of the price elasticities of demand for exports and imports must exceed one (PED exports + PED imports > 1) Model answer: "The Marshall-Lerner condition states that a currency depreciation improves the current account only if the sum of the price elasticities of demand for exports and imports exceeds 1."

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#SECTION 6 — FISCAL AND MONETARY POLICY

Fiscal policy Mark 1: The use of government spending and taxation Mark 2: To influence aggregate demand and achieve macroeconomic objectives Model answer: "Fiscal policy is the use of government spending and taxation to influence aggregate demand and achieve macroeconomic objectives such as growth, price stability, and employment."

Expansionary (reflationary) fiscal policy Mark 1: Government increasing spending or reducing taxation Mark 2: To increase aggregate demand / used to stimulate growth during a recession or below-target growth period Model answer: "Expansionary fiscal policy involves increasing government expenditure or reducing taxation to raise aggregate demand, typically used to stimulate economic growth during a recession."

Deflationary (contractionary) fiscal policy Mark 1: Government reducing spending or increasing taxation Mark 2: To reduce aggregate demand / used to control demand-pull inflation or achieve a balanced budget Model answer: "Deflationary fiscal policy involves reducing government expenditure or increasing taxation to reduce aggregate demand, used to control demand-pull inflation or reduce the fiscal deficit."

Budget deficit Mark 1: When government expenditure exceeds government tax revenue in a given period Mark 2: G > T / requiring borrowing (government bond issuance) to finance the shortfall Model answer: "A budget deficit occurs when government expenditure exceeds tax revenue in a given period, requiring the government to borrow by issuing bonds to finance the shortfall."

Balanced government budget Mark 1: When government expenditure equals government tax revenue Mark 2: G = T / neither borrowing nor saving — the fiscal position is neither in deficit nor surplus Model answer: "A balanced government budget occurs when government expenditure equals tax revenue (G = T), with no net borrowing or fiscal surplus in that period."

Automatic stabilisers Mark 1: Fiscal mechanisms that automatically reduce the impact of economic fluctuations without discretionary policy action Mark 2: In recessions: welfare spending rises and tax revenues fall automatically / in booms: tax revenues rise and welfare spending falls Model answer: "Automatic stabilisers are built-in fiscal mechanisms that dampen economic fluctuations automatically — in recessions, welfare expenditure rises and tax revenues fall, providing counter-cyclical support without requiring government action."

Monetary policy Mark 1: The use of interest rates and money supply instruments by a central bank Mark 2: To influence aggregate demand and achieve macroeconomic objectives including price stability Model answer: "Monetary policy is the use of interest rates, quantitative easing, and related instruments by a central bank to influence aggregate demand and achieve macroeconomic objectives, primarily price stability."

Quantitative easing (QE) Mark 1: A monetary policy instrument where the central bank creates new money to purchase financial assets Mark 2: Increasing the money supply and reducing long-term interest rates / used when conventional rate cuts are exhausted (zero lower bound) Model answer: "Quantitative easing is a monetary policy instrument where the central bank creates new money to purchase financial assets such as government bonds, expanding the money supply and reducing long-term interest rates."

Base rate (Bank rate) Mark 1: The interest rate set by the central bank at which it lends to commercial banks Mark 2: Influencing all other interest rates in the economy / the primary monetary policy instrument Model answer: "The base rate is the interest rate at which the central bank lends to commercial banks, serving as the benchmark that influences all other borrowing and saving rates throughout the economy."

Supply-side policy Mark 1: Government policies designed to increase the productive capacity of the economy Mark 2: By shifting the LRAS curve rightward / improving the quantity or quality of factors of production Model answer: "Supply-side policies are government measures designed to increase the productive potential of the economy by improving the efficiency and quantity of factors of production, shifting the LRAS curve rightward."

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#SECTION 7 — OBJECTIVES AND CONCEPTS

Macroeconomic objectives Mark 1: The main goals of government economic policy Mark 2: Including economic growth, low inflation, low unemployment, current account equilibrium, balanced budget, and greater income equality Model answer: "Macroeconomic objectives are the primary goals of government economic policy, typically comprising economic growth, low and stable inflation, low unemployment, current account equilibrium, balanced budget, and greater income equality."

Gini coefficient Mark 1: A measure of income inequality within a country Mark 2: Ranging from 0 (perfect equality) to 1 (perfect inequality) / higher Gini = more unequal income distribution Model answer: "The Gini coefficient measures income inequality within a country, ranging from 0 (perfect equality) to 1 (perfect inequality) — a higher value indicates greater concentration of income among the wealthy."

Human Development Index (HDI) Mark 1: A composite measure of a country's development Mark 2: Comprising life expectancy, education (mean and expected years of schooling), and GNI per capita Model answer: "The Human Development Index (HDI) is a composite measure combining life expectancy, educational attainment, and GNI per capita to provide a broader assessment of development than GDP alone."

Phillips curve (SRPC) Mark 1: A curve showing the short-run relationship between inflation and unemployment Mark 2: Downward sloping — as unemployment falls, inflation tends to rise / illustrates the short-run trade-off between these two objectives Model answer: "The short-run Phillips curve shows the inverse relationship between the inflation rate and the unemployment rate — as unemployment falls toward the NAIRU, wage and price pressures increase, raising inflation."

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#PART 8 — ANNOTATED EXAMPLES: 0/2 vs 1/2 vs 2/2

The ten most tested Q12a terms. For each: see exactly what earns 0, 1, and 2 marks.

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#TERM 1: RECESSION

0/2: "A recession is when the economy is doing badly." Why 0: "Doing badly" is not an economic concept. No named variable. No qualifier.

1/2: "A recession is when the economy experiences negative growth." Why 1/2: Core concept ✓ (negative growth). Qualifier ✗ — "two or more consecutive quarters" is missing. Could describe a single quarter of negative growth.

2/2: "A recession is a period of two or more consecutive quarters of negative real GDP growth." Why 2/2: Core (negative real GDP growth) ✓ + Qualifier (two or more consecutive quarters) ✓. Both components present. Two sentences not required — one is sufficient here.

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#TERM 2: INFLATION

0/2: "Inflation is when things get more expensive." Why 0: "Things" is not an economic variable. "More expensive" does not specify "general price level" or "sustained."

1/2: "Inflation is a rise in the general price level." Why 1/2: Core ✓ (rise in general price level). Qualifier ✗ — "sustained" missing. A one-off price rise is not inflation. Also missing the measurement (CPI).

2/2: "Inflation is a sustained rise in the general price level, measured by the annual percentage change in the Consumer Price Index (CPI)." Why 2/2: Core (rise in general price level) ✓ + Qualifier (sustained, measured by CPI annual % change) ✓.

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#TERM 3: DISINFLATION

0/2: "Disinflation is when inflation goes down." Why 0: Ambiguous — this could describe deflation (prices falling) OR disinflation (rate slowing). No precision.

1/2: "Disinflation is a fall in the rate of inflation." Why 1/2: Core ✓ (rate of inflation falls). Qualifier ✗ — missing the critical point that the PRICE LEVEL IS STILL RISING, just more slowly. Most students think disinflation means falling prices — it does not.

2/2: "Disinflation is a fall in the rate of inflation — the general price level is still rising but at a decelerating rate." Why 2/2: Core (rate falls) ✓ + Qualifier (price level still rising, rate decelerating) ✓. The qualifier is what distinguishes disinflation from deflation.

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#TERM 4: DEFLATION

0/2: "Deflation is when prices fall." Why 0/2: Technically directionally correct for core, but "prices" not precise (could mean one market). No qualifier (sustained, general level). However this may earn 1/2 in some mark schemes — safer to use precise language.

1/2: "Deflation is a fall in the general price level." Why 1/2: Core ✓ (general price level falls). Qualifier ✗ — "sustained" missing. Also missing the precise measure (negative CPI rate).

2/2: "Deflation is a sustained fall in the general price level, characterised by a negative rate of CPI inflation." Why 2/2: Core (general price level falls) ✓ + Qualifier (sustained, CPI below zero) ✓.

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#TERM 5: REAL GDP

0/2: "Real GDP is GDP in real terms." Why 0/2: Circular definition. "Real terms" uses the defined word. Mark 2 = zero.

1/2: "Real GDP is the total value of goods and services produced in an economy." Why 1/2: Core ✓ (total value of goods and services). Qualifier ✗ — "adjusted for inflation" or "measured at constant prices" is missing. This describes nominal GDP equally.

2/2: "Real GDP is the total value of goods and services produced in an economy, adjusted for inflation / measured at constant prices." Why 2/2: Core ✓ + Qualifier (inflation-adjusted / constant prices) ✓. The qualifier is what makes it "real" rather than "nominal."

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#TERM 6: GDP GROWTH RATE

0/2: "GDP growth rate is how much the economy grows." Why 0: "How much the economy grows" is informal. No variable named. No measurement method.

1/2: "The GDP growth rate is the change in GDP over time." Why 1/2: Core gesture ✓ (change over time). Qualifier ✗ — "annual percentage change" and "real GDP" both missing.

2/2: "The GDP growth rate is the annual percentage change in real GDP, measuring the rate at which an economy's total output is expanding or contracting." Why 2/2: Core (percentage change in real GDP) ✓ + Qualifier (annual, measuring expansion/contraction) ✓.

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#TERM 7: BALANCED GOVERNMENT BUDGET

0/2: "A balanced budget is when the government doesn't spend too much." Why 0: "Doesn't spend too much" is relative and informal. No relationship between G and T stated.

1/2: "A balanced budget is when government spending equals government income." Why 1/2: Core gesture ✓ (spending equals income). Qualifier ✗ — "tax revenue" rather than "income" (income is ambiguous for a government), and "G = T" not stated precisely.

2/2: "A balanced government budget occurs when government expenditure equals tax revenue (G = T), with neither a deficit nor a surplus in that fiscal period." Why 2/2: Core (G = T) ✓ + Qualifier (neither deficit nor surplus, fiscal period specified) ✓.

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#TERM 8: UNEMPLOYMENT (ILO DEFINITION)

0/2: "Unemployment is when people don't have jobs." Why 0: Does not specify the ILO qualifiers. Anyone "without a job" includes students, retirees, carers — none of whom are unemployed by the ILO definition.

1/2: "Unemployment refers to people who are without work and looking for a job." Why 1/2: Core ✓ (without work, looking). Qualifier ✗ — "available to start" missing. The ILO definition requires all three: without paid work + actively seeking + available to start.

2/2: "Unemployment (ILO definition) refers to those of working age without paid employment who are actively seeking work and available to start within two weeks." Why 2/2: All three ILO components present: without paid employment ✓ + actively seeking ✓ + available to start ✓.

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#TERM 9: CURRENT ACCOUNT DEFICIT

0/2: "A current account deficit is when imports are greater than exports." Why 0/2: Partially correct but incomplete — the current account includes services, investment income, and current transfers, not only goods trade. Goods-only deficit = trade in goods deficit, not current account deficit. May earn 1/2.

1/2: "A current account deficit is when a country imports more than it exports." Why 1/2: Direction correct (payments exceed receipts). Qualifier ✗ — "current account" includes goods AND services AND income AND transfers, not just merchandise trade.

2/2: "A current account deficit occurs when a country's total payments for imports of goods, services, income, and current transfers exceed its receipts from exports — requiring a capital account surplus to finance the external imbalance." Why 2/2: Core (payments exceed receipts) ✓ + Qualifier (all four current account components: goods, services, income, transfers) ✓.

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#TERM 10: SUPPLY-SIDE POLICY

0/2: "Supply-side policy is when the government helps businesses to grow." Why 0: "Helps businesses grow" is informal. No economic mechanism or objective named.

1/2: "Supply-side policy is government policy designed to increase the productive capacity of the economy." Why 1/2: Core ✓ (productive capacity). Qualifier ✗ — "shifting LRAS rightward" or "improving factors of production" missing.

2/2: "Supply-side policies are government measures designed to increase the productive potential of the economy by shifting the LRAS curve rightward, improving the efficiency, quantity, or quality of factors of production." Why 2/2: Core (productive potential) ✓ + Qualifier (LRAS rightward, factors of production) ✓.

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#QUICK-REFERENCE: THE TEN MOST TESTED DEFINITIONS

In order of frequency on Q12a (2019–2026):

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VERIDIAN™ | © VERIDIAN 2026. All rights reserved. This material is the intellectual property of VERIDIAN. Unauthorised reproduction, resale, or distribution is prohibited. For personal study use only. Not affiliated with or endorsed by Pearson Edexcel.