2.1.1 Economic Growth

Question 1

GNI

Answer 1

GDP+Net income from abroad

Question 2

Easterlin paradox

Answer 2

As income increases, marginal happiness falls. e.g spend on less meaningful purchases like luxury cars etc

Question 3

Why can’t countries just use exchange rates to compare GDP? (2)

Answer 3

Exchange rates can be volatile

Different price levels-may be able to buy way more in one country

Question 4

GDP limitations to compare countries living standards (5)

Answer 4

Population changes
Income distribution
Subsistence economies
Type of good/service
Underground economies

Question 5

Population changes

Answer 5

If population rises faster than GDP, it means GDP per capita is falling, so people are worse off

Question 6

Income distribution

Answer 6

GDP can increase but may not be distributed equally. E.g Saudi royal family increased GDP through oil but rest remained poor

Question 7

Type of goods

Answer 7

If increases in GDP have negative externalities e.g consumption of fast food can increase AD, but living standards fall as obesity rises etc. Or China exporting lots of plastic toys increasing AD, but resulting in pollution

Question 8

Subsistence economy

Answer 8

The subsistence economy is made up of people who produce goods to consume themselves rather than sell. This production is not recorded as the goods are not sold. This means real GDP does not measure any of the goods and services produced in the subsistence economy and so it underestimates the total amount produced.