2.1.1 - Economic Growth - Comparing National income over time

Question 1

Problems with comparing national statistics over time

Answer 1

. Prices
. Changes in population
. Quality of goods and services
.Defense expenditures
. Consumption and investment
. Externalities

Question 2

Explain prices

Answer 2

Prices have increased over time. This means that an national income increase does not necessarily indicate that there has been an increase in the number of goods and services produced in the economy.

Question 2

Explain Quality of goods and services

Answer 2

Quality of goods may improve over time but they may also fall in price. E.g. cars
The issue is that national income would show this as a fall in national income wrongly showing that living standards have fallen

Question 3

Explain changes in population

Answer 3

National income statistics can be used to compare living standards. If used it is essential to use national income per capita. If population double whilst national income quadruples, people are likely to be nearer twices as well of than four times.

Question 4

Explain defence expenditures

Answer 4

GDP of countries may increase if they focus on war. E.g. GDP of UK was higher during WW2 in comparison to the 1930s. Eventhough GDP was higher, standard of living was lower. This means proportion of national income devoted to defence must be take into account when considering standard of living

Question 5

Explain consumption and investment

Answer 5

It’s possible to increase standard of living today by reducing investment and increasing consumption. However, reducing investment is likely to reduce standards of living from what they might otherwise have been in the future.

Question 6

Define Externalities

Answer 6

. Indirect cost or benefit to an uninvolved third party that arises from the actions of another party

Question 7

Explain Externalities

Answer 7

. National income statistics take no account of externalities such as pollution produced in an economy

. National income statistics may show that national income doubled in a time period, but if the value of the externalities has more than doubled over that time then the rate of growth of the standard of living has less than doubled

. To solve this a new measure called green GDP is being used

Question 8

Define Green GDP

Answer 8

. Measure of GDP, which takes account of the environmental costs of production such as pollution and resource depletion

Question 9

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

Answer 9

. Individuals, businesses and the government can use national income statistics to build forecasting models. This is important for sending crucial information to individuals and businesses when making decisions such as to invest, spend or save.

. Governments can use the national income statistics to enact economic policy as statistics provide information on output and living standards. If real GDP is low in the economy, governments can use expansionary demand side policies. Crucially governments can use national income statistics to evaluate the success of past economic policies in promoting economic growth. This allows for successful policies that have increased GDP to be used again or alternatives to be used where past policies have failed.

. National income statistics can be used as a benchmark to evaluate standards of living. A rise in national income will be interpreted as a rise in living standards for all. Also comparisons can be made regarding living standards to evaluate the effectiveness of one’s country policies compared to another