1.4 Uses of National Income Data

Question 1

Define Economic Growth?

Answer 1

• Economic growth occurs when there is a rise in the value of GDP
• Economic growth leads to higher living standards and more employment opportunities

Question 2

Define GDP?

Answer 2

• GDP measures the quantity of goods and services produced in an economy.
• In other words, an increase in economic growth means there has been an increase in national output

Question 3

What is Real GDP?

Answer 3

• Real GDP is the value of GDP adjusted for inflation.

-For example, if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%.

Question 4

What is nominal GDP?

Answer 4

• Nominal GDP is the value of GDP without being adjusted for inflation.
• This is misleading, because it can make GDP appear higher than it really is.

Question 5

What is total GDP?

Answer 5

• Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period.

Question 6

What is the GDP per capita?

Answer 6

• GDP per capita is the value of total GDP divided by the population of the country.
• Capita is another word for ‘head’, so it essentially measures the average output per person in an economy.
• This is useful for comparing the relative performance of countries.

Question 7

What are two other ways that national income can be measured?

Answer 7

• Gross National Product (GNP)
• Gross National Income (GNI)

Question 8

What is GNP?

Answer 8

• is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country.
• It includes GDP + income earned from overseas assets -income earned by overseas residents.
• GDP is within a country’s borders, whilst GNP includes products produced by citizens of a country, whether inside the border or not.

Question 9

What is GNI?

Answer 9

• is the sum of value added by all producers who reside in a nation, plus product taxes, plus receipts of primary income from abroad (this is the compensation of employees and property income).

Question 10

What is the use and limitations of national income data to compare differences
in living standards between countries?

Answer 10

• GDP does not give any indication of the distribution of income.
  -therefore, two countries with similar GDPs per capita may have different distributions which lead to different living standards in the country.
• GDP may need to be recalculated in terms of purchasing power, so that it can
  account for international price differences.
  -the purchasing power is determined by the cost of living in each country, and the inflation rate.
• There are also large hidden economies, such as the black market, which are not accounted for in GDP.
  -This can make GDP comparisons misleading and difficult to compare.
• GDP gives no indication of welfare.
  -Other measures, such as the happiness index, might be used to compare living standards instead or in conjunction with GDP.

Question 11

What is the importance of using purchasing power parity (PPP) exchange rates
when making international comparisons of living standards?

Answer 11

• This is a theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power.
• This helps to minimise misleading comparisons between countries.