Explaining inter-relationships between the two issues
The third Achieved criterion
- Achieved requires "providing explanations of inter-relationships between statistical data for these two contemporary economic issues using economic concepts and/or models".
- This is the section that connects the two halves of your report, and it is required at Achieved — not an Excellence extra.
- It is also what the Excellence forecast is built on, so the work here pays twice.
What an inter-relationship explanation must contain
1 — The observed pattern in the two series together.
- Do they move in the same direction or opposite directions?
- Does one series turn before the other, and by how long?
- Are there periods where the usual pattern breaks down?
2 — The economic mechanism connecting them.
- Named concept or model, and the chain of steps from one to the other.
3 — The direction of causation, and how you know.
- Which one drives which? A lag is your best evidence: the series that turns first is more likely to be the cause.
4 — Anything that complicates it.
- Does the relationship run both ways? Does something else drive both?
The standard pairings and their mechanisms
Economic growth ↔ unemployment (inverse)
- Mechanism: firms hire workers because of what they produce, so labour demand is derived demand. Rising real GDP means firms sell more → demand for labour shifts right → unemployment falls. On the AS/AD model, AD right raises Y, which requires more labour. On the PPF, unemployment is the economy sitting inside its frontier.
- Lag: unemployment turns two to three quarters after growth, because firms cut hours and stop replacing leavers before making redundancies, and increase existing staff's hours before hiring.
Inflation ↔ the OCR (same direction, lagged)
- Mechanism: CPI rises above the RBNZ's 1–3% band → the RBNZ raises the OCR → retail rates rise → and fall → AD shifts left → the price level falls.
- Lag: the OCR moves after inflation, and inflation responds a year or more later.
Exchange rate ↔ export receipts (inverse)
- Mechanism: a depreciation makes New Zealand exports cheaper in foreign currency, so overseas buyers buy more → export volumes rise → export receipts rise. An appreciation does the reverse.
- Complication: it runs both ways. Rising export receipts mean overseas buyers need more NZ$, which shifts demand for NZ$ right and causes an appreciation.
Economic growth ↔ import payments (same direction)
- Mechanism: rising real GDP means higher household incomes → more spending on imported consumer goods, and firms buy imported machinery → import payments rise → the balance on goods and services worsens.
Two warnings that earn credit
Correlation is not causation.
- Two series can move together because a third factor drives both. Real GDP and imports both fell in 2020 — but the cause of both was the same shock, not one causing the other.
- Saying this, and then explaining why you still think there is a causal link (because a model predicts it, and because the lag runs the right way), is stronger than either ignoring the problem or refusing to draw any conclusion.
Relationships can run both ways.
- Growth reduces unemployment; but falling unemployment raises incomes, which raises consumption, which raises growth.
- Saying "the relationship is two-way, and here is which direction dominates in this period" is a strong Merit-to-Excellence point.
Worked ExampleExplaining an inter-relationship properly
Issue 1: economic growth (real GDP, annual % change). Issue 2: unemployment (unemployment rate, seasonally adjusted). Ten years of quarterly data, plotted together.
⚠️ Invented pattern, for method only.
Explain the inter-relationship between the two.
Step 1 — Describe the observed pattern
The two series move in opposite directions throughout the period.
Growth fell from 3.4% to −1.2% between Year 4 and Year 5; unemployment rose from 4.0% to 5.2% between Year 5 and Year 6. Growth recovered to 4.1% in Year 6; unemployment fell to 3.4% by Year 7.
And unemployment turns after growth does, consistently — by about two to three quarters.
Step 2 — Name the concepts and models
- Derived demand — firms hire workers because of what those workers produce.
- The AS/AD model — AD determines real GDP, which determines how much labour firms need.
- The PPF — unemployment is the economy at a point inside its frontier.
Step 3 — Explain the mechanism, step by step
- Aggregate demand falls, so AD shifts left and real GDP falls from Y to Y1.
- Firms are selling less, so they need fewer workers to produce.
- Because labour demand is derived demand, the fall in demand for output becomes a fall in demand for labour: DL shifts left from DL to DL1.
- At the new equilibrium the wage falls from We to We1 and employment falls from Le to Le1. The workers who lose their jobs are cyclically unemployed.
- On the PPF, the economy moves to a point inside its unchanged frontier: the workers exist and are not being used.
Step 4 — Establish the direction of causation
The lag is the evidence. Growth turns first, and unemployment follows two to three quarters later, consistently and never in reverse.
That ordering is what the derived demand model predicts: demand for labour is derived from demand for output, so output must move first.
Step 5 — Explain why the lag exists
Firms do not lay staff off the moment sales fall. First they run down stock, then cut overtime and hours, then stop replacing leavers. Redundancies come last, because hiring and training are expensive and firms hope the downturn is temporary.
The same applies in reverse: when demand recovers, firms first increase existing staff's hours before taking on new people. So employment recovers after output does.
Step 6 — Note the complications — this is where credit is earned
The relationship runs both ways. Rising unemployment reduces household incomes, so consumption () falls, shifting AD further left and reducing growth again. Growth causes unemployment to fall, and unemployment causes growth to fall — a feedback loop which is why downturns are self-reinforcing.
But the dominant direction here is growth → unemployment, and the lag shows it.
Watch for a period where the pattern breaks. If both series rose together in some year, look for a supply-side cause: a cost shock shifts AS left, which raises the price level and reduces real GDP, so unemployment rises while inflation rises too. A relationship that holds for demand-side shocks can break for supply-side ones — and saying so demonstrates that you understand the mechanism rather than the correlation.