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IB Economics — Inflation and Unemployment: Tutor Prep Guide | CPI, real wages, Phillips curve
Students define inflation as prices rising, then stall on a 5 per cent pay rise against 8.5 per cent inflation. One basket and one labour force settle three numbers.
Objectives — Students can: (1) build a CPI from a basket and convert it into an inflation rate; (2) separate nominal from real and compute the real wage change; (3) distinguish the unemployment rate, the natural rate and cyclical unemployment.
01 Prerequisites (3-minute check)
If any of these fails, fix it before the lesson starts.
| Skill | Quick check | Pass mark |
|---|---|---|
| Percentage | From index 100 to 108.5 | 8.5 per cent |
| Division | 180,000 out of 3,600,000 | 0.05 |
| Nominal against real | Prices rise faster than pay | Real wages fall |
02 Lesson flow (60 minutes)
| Time | Stage | Tutor does | Student does |
|---|---|---|---|
| 0-8 min | Three numbers | CPI, unemployment, real wage | Say how they connect |
| 8-20 min | CPI and inflation | 2604 over 2400, times 100 | Get 108.5 and 8.5 per cent |
| 20-34 min | Real wage | 1.05 divided by 1.085 | Get minus 3.23 per cent |
| 34-44 min | Unemployment rate | 180000 over 3.6e+06 | Get 5.0 per cent |
| 44-56 min | Phillips curve | Short run against long run | Say the long run is vertical |
| 56-60 min | Exit check | Collect three items | Work alone |
03 Teaching script (read it out)
Scene 1: CPI: the base year is always 100, the rate comes after
The basket costs 2400 in the base year and 2604 now, so the CPI is 2604 divided by 2400, times 100, which is 108.5.
The inflation rate is (108.5 minus 100) divided by 100, which is 8.5 per cent.
Make them say it: the CPI is a level, the inflation rate is a change.
The inflation rate is (108.5 minus 100) divided by 100, which is 8.5 per cent.
Make them say it: the CPI is a level, the inflation rate is a change.
Ask them to repeat: why the base year index cannot be anything but 100.
Scene 2: Real wages: divide, do not subtract
Nominal pay rises 5 per cent while prices rise 8.5 per cent. The real change is 1.05 divided by 1.085 minus 1, so minus 3.23 per cent.
Subtracting gives minus 3.5, which overstates the loss, because price rises multiply the original 1 rather than add to it.
Subtracting gives minus 3.5, which overstates the loss, because price rises multiply the original 1 rather than add to it.
Have them compute: real change when nominal pay rises 9 per cent (1.09 over 1.085, so plus 0.46 per cent).
Scene 3: Unemployment and Phillips: a short-run trade-off, a vertical long run
A labour force of 3.6e+06 with 180000 unemployed gives an unemployment rate of 5 per cent. With a natural rate of 4 per cent, cyclical unemployment is 1 per cent.
The short-run curve slopes down, since lower unemployment costs higher inflation; the long-run curve is vertical at the natural rate because expectations catch up.
The short-run curve slopes down, since lower unemployment costs higher inflation; the long-run curve is vertical at the natural rate because expectations catch up.
Watch for: the long run does not mean unemployment never moves, only that inflation cannot buy it down.
04 Question types and worked steps
| Type | Example | Steps | Answer |
|---|---|---|---|
| CPI | Baskets of 2400 and 2604 | This year over base, times 100 | 108.5 |
| Inflation rate | CPI from 100 to 108.5 | (CPI minus 100) over 100 | 8.5 per cent |
| Real wage change | Nominal plus 5, inflation 8.5 | 1.05 over 1.085 minus 1 | minus -3.23 per cent |
| Unemployment rate | 180000 unemployed, 3.6e+06 in the labour force | Unemployed over labour force | 5 per cent |
Sanity check (teach this): An inflation rate can be negative in deflation, but a CPI is always positive; an unemployment rate never exceeds 100 per cent; the real wage change is negative whenever inflation outruns nominal growth.
05 Independent practice (3 questions)
| Question | Answer | What to watch |
|---|---|---|
| CPI this year | 108.5 | Was the base year the denominator |
| Inflation rate | 8.5 per cent | Was 100 subtracted first |
| Real wage change | minus -3.23 per cent | Was it divided, not subtracted |
06 Common mistakes and what to say
| Mistake | Student writes | Say this |
|---|---|---|
| Using this year as the denominator | Gets 92.2 | “The base year is the denominator, and its index is always 100.” |
| Subtracting instead of dividing | Answers minus 3.5 per cent | “Divide, because prices multiply the original wage.” |
| Total population as the denominator | Gets 4.5 per cent | “The denominator is the labour force, not the whole population.” |
| Drawing a downward long-run curve | Still claims a trade-off | “The long run is vertical, because expectations adjust.” |
07 Homework (paper, section and question numbers)
- IB Economics chapter index — Use the three items on this page
08 Exit check (last 5 minutes)
| Question | Answer | Decision |
|---|---|---|
| CPI and inflation | 108.5 and 8.5 per cent | All three right, move to policy evaluation |
| Real wage change | minus -3.23 per cent | One wrong, reteach the division |
| Unemployment rate | 5 per cent | Two wrong, return to act three |
09 Tutor FAQ
Must students date the Phillips curve?
No dates are needed, but the short and long run must be distinguished.
How many types of unemployment?
Frictional, structural, cyclical and seasonal, four to keep apart.
What goes in the evaluation?
Export competitiveness and the redistribution between savers and borrowers is enough.
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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.