Chapter 7 - Introduction to Macroeconomics & National Income Accounting

Question 1

What are the macroeconomic indicators?

Answer 1

1. Gross domestic product (GDP) or National Income
2. Unemployment rate
3. General price level (GPL)

Question 2

What are the macroeconomic aims?

Answer 2

1. Economic growth (incl. sustainable and inclusive growth)
2. Full employment or low rate of unemployment
3. Price stability

Question 3

Define National Income

Answer 3

National Income measures the monetary value of the flow of output of final goods and services produced in an economy over a period of time.

Question 4

What are the 3 approaches to measuring national income?

Answer 4

1. Production/Output approach
2. Income approach
3. Expenditure approach

Question 5

What is the output approach in measuring national income?

Answer 5

The production/output approach measures the money value of final goods and services produced by the various industries in the economy.

Question 6

What is the income approach in measuring national income?

Answer 6

The income approach measures the total income earned by households who provided resources to firms (consisting of wages, rent, interest, profits).

Question 7

What is the expenditure approach in measuring national income?

Answer 7

The expenditure approach measures the total expenditure on goods and services produced by the country (C + I + G + X - M).

Question 8

What is gross domestic product (GDP)?

Answer 8

Gross domestic product measures the total money value of all final goods and services produced within the geographical boundary of a country within a period of time, regardless of whether they are produced by nationals or foreigners.

Question 9

What is gross national product (GNP)?

Answer 9

Gross national product measures the total money value of all final goods and services produced by the residents of a country during a given time period, usually a year.

Question 10

What is factor income from abroad?

Answer 10

Factor income from abroad is the incomes accrued to the residents of the country from the ownership of resources used in the production of goods and services abroad.

Question 11

What is factor income paid abroad?

Answer 11

Factor income paid abroad is the income generated by foreign factors accrued to residents of other countries.

Question 12

What is the relationship between GDP and GNP?

Answer 12

GNP = GDP + Net factor income from abroad
(Net factor income from abroad is the difference between factor income from abroad and that paid abroad)

Question 13

What are the difficulties in measurement of national income?

Answer 13

• Non-reported transactions: info neither openly available nor reported to relevant authorities (think black market and people who want to escape income tax)
• Non-marketed transactions: does not involve monetary exchange; nearly impossible to measure value of G&S
• Availability and reliability of data: data only an estimate of sample/population

Question 14

What is nominal GDP?

Answer 14

Money value of all goods and services produced within the territory at current market prices (changes can be due to change in output/market price)

Question 15

What is real GDP?

Answer 15

Money value of all final goods and services produced within the territory adjusted for price changes

Question 16

How to calculate real GDP?

Answer 16

Real GDP = Nominal GDP x (100 / current year Consumer Price Index)

Question 17

How to find real GDP growth rates?

Answer 17

Real GDP growth rate = Nominal GDP growth rate - inflation rate

Question 18

Define material standard of living (SOL)

Answer 18

Material SOL measures the quantity and quality of goods and services accruing to (accumulated by) each person in the country

Question 19

Define non-material SOL

Answer 19

Non-material SOL refers to the qualitative aspect of living. Factors that affects a person’s quality of life includes the air quality, the amount of leisure time, the exposure to crime, life expectancy, literacy rates, mental health, stress levels etc. These factors intangible but affects quality of life.

Question 20

What are the limitations in measuring material SOL OVER TIME?

Answer 20

a) Inflation or deflation rates (hence use real GDP)
b) Population size (hence use real GDP per capita)
c) Distribution of income (hence use gini coefficient)
d) Types of goods being produced (e.g. households do not directly benefit from production of blast furnace)
e) Qualitative changes in consumer goods (real GDPpc data does not account for quality changes since it looks at output only)
f) Changes in statistical coverage and reliability of data (better system of data collection; accounting definitions and conventions change)
g) Increase monetization of an economy (more goods included in calculation of GDP without much change in material SOL)

Unless otherwise stated, first two limitations are already assumed solved using real GDPpc

Question 21

How to calculate real GDP per capita?

Answer 21

Real GDPpc = Real GDP / Population size

Question 22

How to calculate percentage change in real GDP per capita?

Answer 22

% change in real GDPpc = % change real GDP - % change in population

Question 23

What are the limitations in measuring non-material SOL OVER TIME?

Answer 23

a) Amount of leisure time (consider average working hours per week; rise in GDPpc may be due to rise in working hours and fall in leisure time)
b) Presence of negative externalities (e.g. higher real GDPpc may result in more pollution -> consider pollution levels)

Question 24

What are the limitations in measuring material SOL OVER SPACE?

Answer 24

a) Inflation or deflation rates (hence consider real GDP)
b) Population size (hence consider real GDP per capita)
C) Distribution of income (hence consider gini coefficient)
d) Qualitative changes in consumer goods (quality of goods and services likely to differ between countries)
e) Differences in statistical coverage and reliability of data (different accounting definitions and conventions)
f) Conversion to a common currency (exchange rate influenced by trade and speculations, does not consider relative prices of goods in both countries; hence use purchasing power parity instead)

Question 25

What are the limitations in measuring non-material SOL OVER SPACE?

Answer 25

a) Amount of leisure time (average number of working hours, working conditions, policies towards improving quality of life)
b) Presence of negative externalities (e.g. consider pollution levels in both countries)

Question 26

What are composite indicators?

Answer 26

They are indicators of quality of life which reflect both material and non-material SOL.

Question 27

Name 3 composite indicators

Answer 27

1. Human Development Index (HDI)
2. Measure of Welfare (MEW)
3. Genuine Progress Indicator (GPI)

Question 28

Describe the Human Development Index (HDI)

Answer 28

HDI is a simple average of 3 indicators of development:
1. Life expectancy at birth (indicate quality of healthcare; but can be due to others like lifestyle and education)
2. Education
3. Real GDP per capita (availability of goods and services to each person in country; but it does not consider income inequality)

Each dimension is expressed as a value between 0 and 1. The higher a country’s human development, the higher its HDI.
It omits other factors like environmental degradation and working hours per week.

Question 29

Describe the Measure of Welfare (MEW)

Answer 29

MEW Includes:
+ GNP (limitation: does not consider inflation and income per head; use real GNP per capita instead)
+ Value of leisure time
+ Economic output in underground economy
- Excludes disamenity (but difficult to compute due to inability to agree upon relevant statistic e.g. stress levels)

It does not consider other non-material SOL factors like health and education.

Question 30

Describe the Genuine Progress Indicator (GPI)

Answer 30

GPI includes estimates of the economic contribution of numerous social and envionmental factors which GDP dismisses.

Principles for GPI methodology:
1. Accounts for income inequality while measuring GDP
2. Includes non-market benefits that are not included in GDP
3. Identifies and deducts bads such as environmental degration and loss of leisure time

But additional info that accounts for inflation, health and education could have been included to make GPI more indicative measure of SOL

Question 31

What are the limitations in the use of composite indicators to measure SOL?

Answer 31

• Measuring the indicators: difficulty in quantifying the unquantifiable (e.g. cost of crime, value of leisure time)
• Subjectivity of composite indicators: different indicators highlight differest aspect of material and non-material SOL; residents may value material > non-material SOL
• Composite indicators only focus on certain aspects of SOL: list of aspects is non-exhaustive; better to use more than one compsite indicator when measuring the SOL