3.1.1 - Measuring the Level of Economic Activity

Question 1

Define national income

Answer 1

Money value of a country’s final goods and services produced in one year.

Question 2

Define economic activity

Answer 2

Where scarce resources are allocated to produce goods and services to satisfy human wants.

Question 3

Define macroeconomics

Answer 3

The study of economic activity from a whole economy perspective.

Question 4

Draw the circular flow of income model

Answer 4

Question 5

What do the firms provide the households in the circular flow of income.

Answer 5

Income and output

Question 6

What do the households provide the firms in the circular flow of income.

Answer 6

Consumption expenditure and factors of production

Question 7

List the three injections into the circular flow of income.

Answer 7

• Exports
• Investment
• Government expenditure

Question 8

List the three withdrawals from the circular flow of income.

Answer 8

• Savings
• Tax
• Imports

Question 9

Define GDP

Answer 9

The money value of all goods and services produced by a country in one year.

Question 10

What are the three ways to measure GDP

Answer 10

• Income method
• Output method
• Expenditure method

Question 11

Explain the income method of measuring GDP

Answer 11

Adds the value of income earned by households in one year in the form of:

• Wages paid to labour
• Interest paid to capital
• Rent paid to land
• Profits and dividends paid to entrepreneurs

Question 12

Explain the output method of measuring GDP

Answer 12

Adds the value-added of firms in different sectors of the economy. The sectors are:

Primary - Raw materials
Secondary - Manufacturing
Tertiary - Services

Question 13

Explain the expenditure method of measuring GDP

Answer 13

Value of total expenditures of different sectors in the economy. There are four types of expenditure:

• Consumption - spending by households on final goods and services
• Investment - spending by firms on capital equipment
• Government - spending on public services
• Net exports - the surplus of the value of exports over the value of imports.

Question 14

Define Gross national income (GNI)

Answer 14

The total income generated by a country and is calculated by adding net property income from abroad to GDP.

GDP + Net property income = GNI

Question 15

What form does net property income come in

Answer 15

• Interest on loans made
• Profit from businesses owned
• Rent on property owned
• Remittances on overseas employment

Question 16

Define GNI per capita

Answer 16

GNI per capita is simply measuring GNI per head of population.

GNI / Population = GNI per capita

Question 17

Define Real GDP

Answer 17

GDP adjusted for inflation.

It is calculated by dividing the nominal GDP by the GDP deflator and multiplying by 100.

Question 18

Define economic growth

Answer 18

The increase in a country’s real GDP over time.

Question 19

Draw the business cycle

Answer 19

Question 20

State the four stages of the business cycle

Answer 20

• Boom phase - Above trend rates of growth, rising incomes, falling unemployment, rising inflation.
• Slowdown phase - The rate of economic growth falls, the rise in household incomes fall, unemployment might start to rise and less pressure for inflation to increase.
• Recession phase - Real GDP falls, household incomes fall, unemployment increases and inflation falls.
• Recovery phase - Real GDP starts to increase, household incomes rise, unemployment falls and a rise in inflation.