IB Economics SL — Measuring Economic Activity and Illustrating Its Variations: Notes, Questions & Solutions

IB Economics SL — Measuring Economic Activity and Illustrating Its Variations: Notes, Questions & Solutions

Economic activity is measured mainly through GDP (Gross Domestic Product) and the business cycle, which shows recurring fluctuations between boom, recession, trough and recovery.

Key points

• GDP measures the total value of goods and services produced within a country’s borders in a given period.

• The business cycle has four phases: boom, recession (downturn), trough, and recovery.

• Real GDP adjusts for inflation, while nominal GDP does not — comparisons over time should always use real GDP.

• These fluctuations are explained using aggregate demand and aggregate supply analysis.

Practice questions

1. Define “real GDP” and explain why it is preferred over nominal GDP for comparing economic activity across years. Hint: (Real GDP adjusts for inflation, so it reflects genuine changes in output rather than price changes).

2. Name the four phases of the business cycle in order. Hint: (Boom, recession, trough, recovery).

3. During which phase of the business cycle is unemployment typically highest? Hint: (Trough / the depth of a recession).

4. Give one limitation of using GDP alone to measure a country’s living standards. Hint: (It does not account for income distribution, non-market activity, or environmental costs).

5. What happens to GDP during a recession, by definition? Hint: (It falls — commonly defined as two consecutive quarters of negative real GDP growth). 

 

Written by sortmyprep | Reviewed by IB Teacher | Last updated: September 15, 2026