8.2 Measure of Economic Activity

Question 1

Circular flow of income in terms of national income

Answer 1

Value of the aggregate output produced is equal to the total income generated from producing that output which is equal to the total expenditure made to purchase the output.

Question 2

Explain why the terms ‘national income’ and ‘aggregate output’ are often used interchangeably.

Answer 2

The circular flow of income model shows that the value of aggregate output produced is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.

Question 3

Identify some reasons why it is useful to know the value of aggregate output.

Answer 3

Allows us to:

1. assess an economy’s performance over time
2. make comparisons of income and output performance with other economies.
3. establish a basis for making policies that will meet economic objectives.

Question 4

Explain why we measure aggregate output in value terms

Answer 4

It is difficult to add up quantities of output of many goods and services. Hence, value terms is used as the uniform unit of measurement.

Question 5

Explain why we county only the value of final goods and services when measuring the value of output.

Answer 5

To avoid double counting that would arise from including the values of intermediate goods and services.

Question 6

Identify the 4 expenditure components of GDP and explain each of these

Answer 6

1. Consumption spending
2. Investment spending
3. Government spending
4. Total spending on exports - total spending on imports (net exports)

Question 7

Explain 3 ways GDP can be measured.

Answer 7

1. The expenditure approach: measures the total amount of spending to buy final goods and services in a country over a time period.
2. The income approach: sum of all income earned by FOP that produce goods and services within a country over a time period.
3. The output approach: measures the value of each good and service produced in the economy over a particular time period.

Question 8

Outline he type of information each approach offers about the economy

Answer 8

1. expenditure: allows economists to see the relative contribution of each component of GDP, how these might change over time, and to make comparisons over time or across counties.
2. income: allows economists to see the relative income shares of the different factors of production, how these might change over time, and to make comparisons over time or across countries.
3. output: allows economists to study the performance of each individual sector by looking at its relative share in the total output, how this changes over time, and to make comparisons of performance across sectors across countries.