Chap 29

Question 1

Define Gross domestic product (GDP)

Answer 1

the total output of a country

Question 2

Methods of measuring GDP

Answer 2

The output, income and expenditure methods

Question 3

Circular flow of income

Answer 3

The movement of expenditure, income and output around the economy

Question 4

The methods of calculating GDP

Answer 4

1. The output method:
   adding up the output produced by all the industries in the country
2. The income method:
   all the incomes which have been earned in producing the country’s output. (Transfer payments not included)
3. The expenditure method:
   adding up all the expenditure on the country’s finished output.
   (add exports and deduct imports)

Question 5

Define Value added

Answer 5

the difference between the sales revenue received and the cost of raw materials used

Question 6

Define Transfer payments

Answer 6

transfers of income from one group to another not in return for providing a good or service.

eg. pensions, unemployment benefits

Question 7

GDP includes

Answer 7

consumption, investment, government expenditure and exports minus imports.

Question 8

Define Nominal GDP

Answer 8

GDP at current market prices and so not adjusted for inflation.

Question 9

How can you adjust nominal GDP by taking out the effects of inflation?

Answer 9

Multiply nominal GDP with the price index in the base year, divided by the price index in the current year

Question 10

Define Real GDP

Answer 10

GDP at constant prices and so adjusted for inflation

Question 11

Real GDP per capita

Answer 11

dividing real GDP by population

Question 12

Why economic activity goes unrecorded

Answer 12

1. Activity is on a small scale and there are relatively high costs of registering a business.
2. Activity is illegal, such as illegal drug dealing, and work undertaken by immigrants who have not been given permission to work in the country.
3. Person undertaking job does not want to pay
   a tax on it.
4. Some employers may want their businesses to be in the informal economy, so they can avoid government regulations such as having to pay the national minimum wage.

Question 13

Why do GDP figures tend to understate the true level of output

Answer 13

This is because of the existence of unrecorded economic activity, both legal and illegal, and non-marketed goods and services.

Question 14

The size of undeclared economic activity is influenced by a number of factors

Answer 14

These include the number of activities that are declared to be illegal, tax rates, penalties for tax evasion and government regulations.

Question 15

The existence of undeclared economic activity effects on an economy

Answer 15

1. Understates the output produced through GDP figures
2. Tax revenue is below what could be collected.
3. Official inflation rate overstates the rate at which the general price level is rising (Prices charged in undeclared economic activity tend to rise less quickly than in the formal economy)

Question 16

Define non-marketed goods and services

Answer 16

products which are not bought or sold

Eg. subsistence agriculture, people who clean their own houses and repair their own cars, are all providing products, but these are not counted in GDP.

Question 17

Define Subsistence agriculture

Answer 17

the output of agricultural goods for farmers’ personal use.

Question 18

Define Recession

Answer 18

a reduction in real GDP over a period of six months or more

Question 19

Causes of a recession

Answer 19

1. Decrease in aggregate demand
2. Decrease in aggregate supply.

Question 20

Why aggregate demand may fall (negative demand-side shock)

Answer 20

1. Consumer expenditure could decline due to a fall in consumer confidence
2. Investment could decline due to a fall in business arising from a global financial crisis
3. The government
   may cut back its spending and net exports could fall as a result of a rise in the exchange rate.

Question 21

A decrease in aggregate supply (negative supply-side shock) could result from

Answer 21

1. A rise in fuel or raw material costs;

would increase firms’ costs of production which may cause them to produce less.

Question 22

Consequences of a recession

Answer 22

1. Unemployment is likely to rise
2. Lower living standards
3. Investment discouraged
4. Tax revenue will decline
5. Government spending on benefits increases (^ budget deficit)

Question 23

Causes of economic growth

Answer 23

1. An increase in aggregate demand-> rise in output
2. If the quantity or quality of resources increases

Question 24

Consequences of economic growth

Answer 24

1. Improve living standards of people
2. Increase government tax revenue
3. Political and economic standing and influence usually increases

Question 25

Define International Monetary
Fund (IMF)

Answer 25

an international organisation
which promotes international cooperation and helps countries with balance of payments problems

Question 26

Why would economic growth involve costs?

Answer 26

1. If the economy is working at full capacity, it may be necessary to shift resources from making consumer goods to capital goods, in order for it to grow.
2. Increase pollution
3. Damage the natural environment
4. Greater stress on workers

Question 27

Define Sustainable economic growth

Answer 27

economic growth that does not endanger the country’s ability to grow in the future

Question 28

The net impact of economic growth is influenced by

Answer 28

1. Rate
2. Means adopted to achieve it
3. Distribution of its benefits

Question 29

Advantages of a productive capacity increase over economic growth

Answer 29

1. More goods and services can be enjoyed without an increase in prices (easier for firms and households to plan for the future and hence encourages investment)
2. Extra resources which develop when productive potential increases, can
   also be used to reduce levels of pollution

Question 30

Policies to promote economic growth

Answer 30

1. Expansionary fiscal and/or monetary policy

E.g A reduction in income
tax rates or a cut in the rate of interest

2. Demand-side and supply-side policy measure

E.g Improved education and training to increase productive potential