4.2.1.4_-_Uses_of_national_income_data

Question 1

Why does the value of GDP increase as economic growth occurs?

Answer 1

GDP measures the quantity of goods and services produced in an economy. A rise in economic growth means there has been an increase in national output.

Question 2

How does economic growth impact living standards?

Answer 2

Economic growth leads to higher living standards and more employment opportunities

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. In the Real GDP example, nominal economic growth would be 4%. This is misleading, because it can make GDP appear higher than it really is

Question 5

What is GDP per capita?

Answer 5

GDP per capita is the way that GDP can be used to give an indication of a country’s standard of living.

Question 6

What is the problem with comparing countries GDP per capita?

Answer 6

GDP does not give any indication of the extent of income inequality - distribution of income between the rich and poor. Therefore, two countries with similar GDPs per capita may have different distributions which lead to different living standards in the country.

Question 7

Why might GDP need to be recalcuated?

Answer 7

GDP may need to be recalculated in terms of purchasing power, so that it can account for international price differences.

Question 8

What makes GDP comparisons misleading and difficult?

Answer 8

There are large hidden economies, such as the black market, which are not accounted for in GDP.

Question 9

What is purchasing power parity (PPP) ?

Answer 9

A principle that calculates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power.

For example, if a car cost £15,000 and the exchange rate between the UK and the US is 1.5 £ per $, then in the US, the car should cost $10,000. This means both cars cost the same number of US dollars, and the same number of pounds Sterling

Using the PPP to compare countries’ living standards involves adjusting the GDP per capita figures to take into account the differences in purchasing power in those countries. This makes for a more accurate and easier comparison

Question 10

How is purchasing power determined?

Answer 10

The purchasing power is determined by the cost of living in each country, and the inflation rate.

Question 11

What is Gross National Product (GNP)?

Answer 11

The total output of the citizens of a country, whether or not they are resident to that country

Question 12

How is GDP and GNP different?

Answer 12

GDP is within a country’s borders, whilst GNP includes products produced by citizens of a country, whether inside the border or not.

Question 13

What is Gross National Income (GNI)?

Answer 13

GDP plus net income from abroad

Question 14

What can be determined by comparing a countries GDP and GNI?

Answer 14

By comparing a country’s GDP and GNI, we can determine how much foreign aid or foreign labour a country receives.

Question 15

What are the four main indicators used by governments to monitor how the economy is doing?

Answer 15

• The rate of economic growth
• The rate of inflation
• The level of unemployment
• The state of the balance of payments

Question 16

What is national output?

Answer 16

All the goods and services produced by a country

Question 17

How can economic growth be measured?

Answer 17

By the change in national output over a period of time

Question 18

How can national output be measured?

Answer 18

In two ways:
- By volume - Adding up the quantity of goods and services produced in one year
- By value - value (£billions) of all the goods and services produced in one year

National output is usually measured by value - this is called Gross Domestic Product (GDP)

Question 19

What is national (aggregate) expenditure and how does it relate to aggregate demand?

Answer 19

Aggregate expenditure is the current value of all the finished goods and services in the economy.
Whereas Aggregate demand is the total demand for final goods and services in the economy at a given time and price level.

Question 20

How can GDP also be calculated?

Answer 20

By adding up the total amount of national expenditure (AD) or by adding up the total amount of national income earned in a year

This means that in theory national output = national expenditure = national income (circular flow of income)

Question 21

What is GDP?

Answer 21

A monetary measure of the market value of all the final goods and services produced in a specific time period

// Value measure of national output

Question 22

What is the rate of economic growth?

Answer 22

The speed at which national output grows over a period of time

Question 23

What are the two ways in which a change in GDP can be shown?

Answer 23

As a value (£billion) or as a percentage

Question 24

What is the formula for measuring the rate of economic growth over time as a percentage?

Answer 24

{ Change in GDP (£billions) / Original GDP (£billions) }
x 100 = Percentage change

Question 25

What might some GDP growth be due to?

Answer 25

Price rises (inflation)

Question 26

What is the GDP per capita formula?

Answer 26

Total GDP (Total national output) / Population size = national output per person (GDP per capita)

Question 27

What is net income from abroad?

Answer 27

Any income earned by a country on investments and other assets owned abroad, minus any income earned by foreigners on investments domestically

Question 28

What indicators do economists use to compare the standards of living between different countries?

Answer 28

GDP per capita - in theory the higher the GDP per capita, the higher the standard of living
GNI per capita
GNP per capita

Question 29

What is GNI and GNP per capita both used for and how are they calculated?

Answer 29

Both used to compare living standards between different countries. They are calculated in a similar way to GDP per capita - by dividing the total GNI and GNP by the country’s population

Question 30

What is purchasing power?

Answer 30

The real value of an amount of money in terms of what you can actually buy with it
This can vary between countries. For example less developed countries such as Malawi, $1 will buy more than in a more developed country e.g. Canada

Question 31

What other differences could create difficulties when comparing different countries’ GDP per capita figures?

Answer 31

• Number of hours worked per week by workers
• Working conditions
• Level of damage to the environment
• Different spending needs (heating)
  // Points link to happiness economics (measuring development)
• The different development levels of the comparing countries, under-developed (poor) economies versus rich developed economies