2.1 - Signposting

Question 1

Benefits of using National Income Statistics e.g. Real GDP

Answer 1

1. National income statistics can be used as a report card for a country, where the performance of an economy over time can be analysed.
2. Governments can use national income statistics to enact and inform economic policy.
3. Individuals, businesses and the government can use national income statistics to build forecasting models using extrapolation for example.
4. National income statistics are used as a benchmark to evaluate standards of living.

Question 2

Problems with Real GDP as a Measure of Economic Growth

Answer 2

1. A large amount of data needs to be collected to accurately measure GDP, data that comes from varied sources.
2. The informal economy (unrecorded economic activity) will mean the country’s official GDP figures are lower than what they should be.
3. The problem of double counting. Using the output method to calculate Real GDP can lead to it.

Question 3

Problems with Real GDP as measure of living standards

Answer 3

1. Real GDP is purely a single measure of living standards - it only measures changes in income.
2. GDP only accounts for the quantity of output produced, it provides no information regarding the quality of that output. To overcome this problem Green GDP
3. Real GDP does not provide information regarding the distribution of income.
4. The composition of output produced may not provide an immediate boost to living standards.
5. Real GDP is often calculated by converting from local currency to US Dollars to provide easier international comparisons in data. The problem with doing this is that nominal exchange rates are used rather than real exchange rates that adjust for changes in purchasing power (changes in costs and prices) between countries.
6. Real GDP does not take account for remittance income
7. Real GDP can misguide an increase in living standards by included profit made by MNCs (multi national corporations). To over come problem 6 and 7 Gross National Income (GNI)

Question 4

Cause of Short Run Economic Growth

Answer 4

1. A cut in interest rates
2. Governments could reduce the marginal rate of income tax for those in lower incomes tax bands or increase the income tax free allowance.
3. Governments can reduce the level of corporation tax
4. Governments can boost their spending
5. The exchange rate could be weakened.

Question 5

Causes of Long Run Economic Growth

Answer 5

1. Government spending on education.
2. Government spending on infrastructure.
3. Governments offering subsidies or tax allowances to increase the incentive for firms to invest.
4. Reducing the marginal rate of income tax.
5. Reducing corporation tax
6. Privatisation
7. Deregulation
8. Trade Liberalisation

Question 6

Cause of Recession - Demand Side Shocks

Answer 6

1. A sudden fall in consumption, caused by a housing or stock market crash
2. A sudden fall in investment
3. A sudden fall in spening by foreigners
4. A banking or financial crisis

Question 7

Causes of Recession - Supply Side Shocks

Answer 7

1. A sudden increase in price of oil, and other commodoties
2. A rise in business taxes like VAT

Question 8

Benefits of Economic Growth

Answer 8

1. A fall in unemployment
2. Highr profits for firms
3. FIscal dividend for the government

Question 9

Costs of Economic Growth

Answer 9

1. Unrestrained economic growth will accelerate demand-pull inflation
2. Economic growth via an increase in Real GDP only accounts for the quantity of output produced, it provides no information regarding the quality of that output.
3. Economic growth does not necessarily mean that incomes are increasing for all in society.
4. Rising incomes is only one aspect of improving living standards.

Question 10

Evaluation of Economic Growth

Answer 10

1. Growth should be sustainable.
2. Growth should be inclusive.
3. Growth should be sustained