DSE Economics | Inflation and unemployment guide | CPI, real wages, unemployment rate

2026-11-01

Tutor lesson-prep guides · Secondary Economics

Students can say prices rose, then compute real wages by subtracting the inflation rate and the unemployment rate over the whole population. Both errors are the same habit: never writing the numerator and denominator. This lesson fixes the denominator first.

Objectives — Students can: (1) compute the inflation rate from the CPI and explain its limits; (2) separate nominal from real wages using ratios; (3) compute the unemployment rate on the labour force; (4) state who gains and who loses from inflation and unemployment.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Percentage change	(new-old)/old x 100	1200 to 1500 is 25%
Index numbers	base year equals 100	the CPI shows relative change only
Labour force	employed plus unemployed	excludes retirees and full-time students

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-10 min	CPI and inflation	old figure is the denominator	(1500-1200)/1200
10-22 min	Limits of the CPI	the basket goes stale	substitutes and quality change
22-36 min	Nominal and real	use ratios, not subtraction	+6% against 4%
36-48 min	Unemployment rate	denominator is the labour force	152000/3800000
48-56 min	Who is affected	losers and gainers	fixed-income earners lose
56-60 min	Exit check	three questions, marked at once	independent work

03 Teaching script (read it out)

Scene 1: Opening move: write the denominator before the numerator

The inflation rate divides by the base-period price: the CPI rises from 1200 to 1500, so the rate is (1500-1200)/1200 = 25%. The unemployment rate divides by the labour force: 152,000 unemployed out of 3,800,000 gives 4.0%.
Using the whole population understates unemployment badly, because retirees and full-time students are outside the labour force. Ask the student: why is a homemaker not counted as unemployed? (Not actively seeking work, so not in the labour force.) Student task: circle numerator and denominator on a data set before pressing any calculator.

Scene 2: Nominal and real: divide, do not subtract

Nominal wages rise 6% with 4% inflation, so real wages change by (1+0.06)/(1+0.04) – 1 = 1.92%, not 2%.
Subtraction is only an approximation at very low inflation; the DSE expects the ratio because both wages and prices compound. When a question asks about purchasing power, it wants the real change. Student task: nominal +3% against 5% inflation, up or down? (Down about 1.90%.) Reminder: write “real wages fall about 1.9%”; a bare “fall” earns nothing.

Scene 3: Effects and policy: one sentence per group

Inflation hurts fixed-income earners such as pensioners and landlords on long leases, and helps borrowers whose repayments shrink in real terms. An unemployment rate of 4.0% is low, but hidden unemployment and underemployment sit outside it.
Policy answers must separate demand management, fiscal and monetary, from supply-side measures such as training and reducing frictions: the first treats cyclical unemployment, the second structural. Ask the student: can a rate cut fix structural unemployment? (No, it stimulates demand, not skills mismatch.) Student task: write one Hong Kong example for each of the four unemployment types.

04 Question types and worked steps

Type	Example	Steps	Answer
Inflation rate	CPI 1200 to 1500	change over base	25%
Real wage	nominal +6%, inflation 4%	ratio method	+1.92%
Unemployment rate	unemployed over labour force	numerator over denominator	4.0%
Participation rate	labour force over population aged 15+	watch the denominator	61.29%

Sanity check (teach this): An inflation rate can be negative, deflation, but never below -100%. Real wage growth must be below nominal whenever inflation is positive: 6% against 1.92%. The unemployment denominator always exceeds the numerator; above 100% means the fraction is upside down. Rate times labour force must return the unemployed: 0.0400 x 3,800,000 is about 152,000. A participation rate above 100% is impossible, since the labour force is part of the population aged 15 and over.

05 Independent practice (3 questions)

Question	Answer	What to watch
CPI 1200 to 1500	25%	(1500-1200)/1200
Nominal +6%, inflation 4%	+1.92%	1.06/1.04-1
152,000 unemployed of 3,800,000	4.0%	numerator over denominator

06 Common mistakes and what to say

Mistake	Student writes	Say this
Subtracting for real wages	answers +2%	“Wages and prices both compound, divide them, do not subtract.”
Using total population	answers 2.5%	“The denominator is the labour force, retirees and students are out.”
Mixing unemployment types	cutting rates for structural unemployment	“Rate cuts lift demand, a skills mismatch needs training.”
Direction without a number	says purchasing power fell	“Give the percentage, examiners want the figure.”

07 Homework (paper, section and question numbers)

Secondary economics chapter index — questions 3 and 5 are the same type
Prep guide home — other chapters in this subject
DSE economics papers — percentage warm-up

08 Exit check (last 5 minutes)

Question	Answer	Decision
CPI 100 to 110	10%	all three correct means move to monetary policy
Denominator of the unemployment rate	the labour force	one wrong means reteach
Nominal +5%, inflation 3%	about +1.94%	two wrong means back to act one

09 Tutor FAQ

Is a rising CPI the same as inflation?

Only the change between two dates matters; the level of the index alone says nothing.

Can real wages be nominal minus inflation?

Only as an approximation at low inflation; the standard method is (1+nominal)/(1+inflation)-1.

Why is unemployment low while people still cannot find work?

Structural and frictional mismatch: the skills on offer do not match the vacancies, whatever the total.

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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.