GDP (measures of NI, circular flow, multiplier, GDPmacrotarget)

Question 1

An economy is in equilibrium when

Answer 1

the rate of injections = rate of withdrawals from circular flow

Question 2

Define withdrawals and give examples

Answer 2

Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output) e.g. savings, taxation, imports

Question 3

Define injections and give examples

Answer 3

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output e.g. investment expenditure (capital like new technology), government expenditure (NHS, defence, education), UK export expenditure

Question 4

What is the difference between income and wealth

Answer 4

Income is a flow of money going to factors of production whereas wealth is a large amount of money or possessions.

Question 5

How can the productive potential of an economy and economic growth be increases

Answer 5

Increase labour, land, capital or enterprise

Question 6

Define GDP

Answer 6

Gross Domestic Product is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. GDP is usually calculated on an annual basis or quarterly basis

Question 7

Define economic growth

Answer 7

the percentage increase in the potential maximum output of an economy in a given time period, usually a year. Difficulties in measuring potential output however means that economic growth is usually measured as percentage increase in GDP in a given year

Question 8

When does economic growth occur

Answer 8

when there is a rise in the value of GDP

Question 9

Define actual growth

Answer 9

Actual growth is the percentage increase in a country’s real GDP and is usually measured annually and is caused by AD increases

Question 10

Define potential growth

Answer 10

Potential growth is the long run expansion of the productive potential of an economy caused by AS increases (what could be produced if fully employed)

Question 11

How can national income be measured

Answer 11

Gross National Product is the market value goods and services produced in one year by labour and property supplied by the citizens of a country and allocates production based upon ownership not location
- Gross National Income is the total domestic and foreign output claimed by residents of a country consisting of GDP plus incomes earnt by foreign residents minus income earned in the domestic economy by non-residents

Question 12

Define the multiplier effect

Answer 12

The multiplier effect is where an original injection into the circular flow of income leads to secondary spending rounds and a multiplied expansion of output. The size of the multiplier depends upon household’s marginal propensity to consume (MPC). The size of the multiplier can be calculated using (1/1-MPC)

The significance of the multiplier can be used regarding changes in aggregate demand and economic growth for evaluation

Question 13

Multiplier formulae

Answer 13

k = (1/1-MPC) = 1/MPW = 1/MPS
(MPS+MPC = 1)
MPW = MPS+MPT+MPM
k = change in national income / change in expenditure
MPC = change in consumption/change in income
MPS = change is savings/change in income
MPT = change in tax/change in income
MPM = change in imports/change in income

Question 14

Economic growth can be depicted by…

Answer 14

outward shift in PPF

positive shift in LRAS

Question 15

What causes true economic growth (growth in potential output)

Answer 15

to increase the productive potential of the economy and therefore create true economic growth one of the factors of production must be increased i.e.

labour
land
capital
enterprise

increase retirement age, immigration

Question 16

Name and explain a measure of economic activity

Answer 16

GDP is the total value of all goods and services produced over a given time period excluding net property income from abroad

Question 17

Problems with GDP

Answer 17

GDP figures are often used to indicate living standards however problems are:

differences in the distribution income and wealth - richest 20% have massive economic growth whereas poorest have very small growth so GDP usually measures richest

externalities - more goods = more pollution, GDP does not take into account externalities

hidden economy - black market not recorded e.g. tax fraud

non-marketed goods - such as healthcare or education which are free so hard to value

Question 18

Costs and benefits of economic growth on consumers

Answer 18

higher wages and less unemployment and higher confidence so more consumption meaning standard of living improves

growth doesn’t benefit everyone equally and those on low fixed incomes might feel worse off if high inflation and inequality could increase

higher demand pull inflation due to increase AD from consumption increase

consumers face more shoe leather costs meaning spend more time and effort finding best deal while prices rise

benefits of consumption may not last after first few units due to law of diminishing returns which states that the utility consumers derive from consuming a good diminishes as more of the good is consumed

Question 19

Costs and benefits of economic growth on firms

Answer 19

Firms could face more menu costs as a result of higher inflation as they keep changing their prices

increase wage pressure, pay higher wages as employment more scarce, loss of profits

higher demand means more profit which increases investment - also driven by higher levels of business confidence

higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run

As firms grow, they can take advantages of the benefits of economies of scale

If there is more economic growth in export markets, firms may face more competition which will make them more productive and efficient but will also give them more sale opportunities

Question 20

Cost and benefits of economic growth on the government

Answer 20

Benefit - the government budget might improve, since fewer people require welfare payments and more people will be paying taxes

Cost - government might increase spending on healthcare if consumption of demerit goods increases

Question 21

Impacts of economic growth on current and future living standards

Answer 21

Cost - high levels of growth could lead to damage to the environment in the long run due to negative externalities from the consumption and production of some goods and services e.g. oil in cars

Benefit - as consumer incomes increase some people may be able to show more concern about the environment

lead to development of technology to produce more eco-friendly goods and services

higher average wages mean consumers can enjoy more goods and services of higher quality and more goods means better standards of living

public services improve since governments have higher tax revenues so can afford to invest in services leading to increase in life expectancy and education levels

Question 22

How can you use the significance of each component of AD to help evaluate

Answer 22

Consumption affects AD a lot more than Net exports so when looking into AD changes, Net exports will not affect it dramatically whereas consumption would

Question 23

As you input money into the economy there is a

Answer 23

multiplied increase (100%) of the inputted amount in the economy

Question 24

What is economic growth and how is it depicted

Answer 24

Expansion of productive potential of the economy

depicted by an outward shift in the PPF or in the LRAS curve

Question 25

Short term growth is calculated...

Answer 25

annually by the percentage change in real national output

Question 26

Long term growth is a _____ which is a _____

Answer 26

trend | potential

Question 27

Factors which cause economic growth

Answer 27

Increase in aggregate demand Improving the labour force with a better quality and quantity to increase productivity Improved, more productive technology More investment to fuel growth Capital deepening which is an increase in the size of physical capital stock

Question 28

Discuss international trade for export led economic growth

Answer 28

Export led growth occurs when countries open up their economies to the international market (e.g. China). International trade is important for this as counties can specialise where they have a comparative (when it can produce at lower opportunity costs than others) increasing world output and lowering average costs However means economy is unbalanced since surplus on current account so unsustainable as relies on economic state of other countries so if consumer country in recession exports and growth falls

Question 29

Economic growth occurs when

Answer 29

there is a rise in the value of Gross Domestic Product

Question 30

GDP measures the

Answer 30

quantity of goods and services produced in a economy

Question 31

Real GDP is the

Answer 31

value of GDP adjusted for inflation

Question 32

Nominal GDP is the

Answer 32

value of GDP without being adjusted for inflation

Question 33

Total GDP is the

Answer 33

combined monetary value of all goods and services produced within a country's borders during a specific time period

Question 34

GDP per capita is the

Answer 34

value of the total GDP divided by the population of the country

Question 35

Gross national product is the

Answer 35

market value of all products produced in a year by the labour and property supplied by the citizens of once country

Question 36

Gross national income is the

Answer 36

sum of value added by all producers who reside in a nation plus product taxes plus receipts of primary income from abroad

Question 37

National income is the

Answer 37

total value a country’s final output of all new goods and services produced in one year

Question 38

Circular flow of income is

Answer 38

the way income flows between firms and households through factors of production and goods and service with injections and withdrawals from the government, the trade sector and the foreign trade` sector through investment imports and savings

Question 39

Purchasing power parity is the... and why is it good

Answer 39

exchange rate at which a unit of currency will buy a bundle of goods and services wherever it is spent which helps minimise misleading comparisons between countries and makes it more accurate when comparing them

Question 40

What are the limitations of using GDP to compare living standards between countries over time

Answer 40

GDP does not give any indication of distribution of income leading to inaccurate representations of average living standards within a country may need to be recalculated in terms of PPP so that it can account for international price differences there are large hidden economies unaccounted by GDP making it misleading gives no indication of welfare unlike happiness index

Question 41

What is the long-term trend in growth rates

Answer 41

the long run expansion of the productive potential of an economy caused by an increase in AS

Question 42

What is the potential output of an economy

Answer 42

what the economy could produce if resources were fully employed

Question 43

When does an output gap occur

Answer 43

when there is a difference between the actual level of output and the potential level of output measured as a percentage of national output

Question 44

A negative output gap occurs when... and what are the effects

Answer 44

A negative output gap occurs when the actual level of output is less than the potential level of output putting downward pressure on inflation – usually means there is the unemployment of resources in an economy so labour and capital are not used to their full productive potential meaning lots of spare capacity in the economy negative output gap using ASAD - Equilibrium < LRAS therefore negative output gap, LRAS is potential output

Question 45

A positive output gap occurs when... and what are the effects

Answer 45

A positive output gap occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity such as if labour works overtime. If productivity is growing, the output gap becomes positive putting upwards pressure on inflation e.g. China positive output gap using ASAD - Equilibrium > LRAS therefore positive output gap

Question 46

What is meant by the short run

Answer 46

The short run is defined as the period when money wage rates and the prices of all other factor inputs in the economy are fixed.

Question 47

Why does aggregate supply slope up in the short run

Answer 47

Assume that firms wish to increase their level of output. In the short run, they are unlikely to take on extra workers. Taking on extra staff is expensive; sacking them is costly in monetary terms and in terms of industrial relations within the company. So firms tend to respond to increases in demand in the short run by working their existing labour force more intensively, for instance through overtime. Firms will need to provide incentives to workers to work harder or longer hours. In many sectors of the economy, firms have the power to increase their prices in response to these increasing labour costs. It only takes prices to increase in some sectors before the general price level increases explaining the upward sloping short run AS curve.

Question 48

Why does the aggregate demand curve slope downwards

Answer 48

Diminishing marginal returns to the variable factor - when you increase labour the increase in productivity is reduced but costs of producing more is higher as labour cost is fixed and returns decreases. Average units cost more due to DMR so output only increases if price increases

Question 49

Negative output gap means that

Answer 49

downward pressure on inflation

Question 50

Positive output gap means that

Answer 50

upward pressure on inflation

Question 51

Positive output gap achieved when

Answer 51

actual GDP > potential GDP

Question 52

Effects of positive output gap

Answer 52

* Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime. * The main problem is likely to be an acceleration of demand-pull and cost-push inflation. * A positive output gap is associated with countries where an economy is over-heating because of fast and rising demand - a good example of this might be countries such as India and China

Question 53

Negative output gap achieved when

Answer 53

If actual GDP is less than potential GDP

Question 54

Effects of negative output gap

Answer 54

Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment A rising number of people out of work indicate an excess supply of labour, which causes pressure on real wage rates.

Question 55

Keynesian vs classical in output gap and unemployment

Answer 55

Keynesian economists believe there is always a negative output gap in the short run and long run and there is always unemployment and to reduce unemployment you must increase aggregate demand Classical economists believe markets clear in the long run so there is full employment and there are output gaps in the short run but not the long run as they clear because each micro-market clears at equilibrium in the long run

Question 56

In a classical economists LRAS diagram with 3 AD curves and one LRAS curve (ALWAYS COMPLETELY VERTICAL AS FULL UNEMPLOYMENT) where is the output gap

Answer 56

Negative output gap between Ye and Y1 and a positive output gap between Ye and Y2

Question 57

In a Keynesian economists LRAS curve with one LRAS and two AD where is the output gap

Answer 57

Negative output gap between Y1 and Y2 as

Question 58

Output vs time graph shows what

Answer 58

potential growth straight line y-intercept just above origin actual growth curve started just above and fluctuating either side of potential growth. In the semicircle above potential growth there is a positive output gap because actual growth > potential growth and in the semicircle below potential growth there is a negative output gap because actual growth < potential growth

Question 59

The calculation for the output gap is

Answer 59

Actual output - potential output Y-Y* (Y*=potential output=LRAS) (Y=actual output) equilibrium < LRAS If +ve then inflationary gap i.e. the growth of aggregate demand is outspacing the growth of aggregate supply causing demand-side inflation If -ve then recessionary gap causing deflation

Question 60

In classical LRAS how to know whether negative or positive output gap

Answer 60

equilibrium < LRAS negative output gap equilibrium > LRAS positive output gap LRAS = potential output = Y*

Question 61

Problems with using GDP/Capita as a measure of living standards

Answer 61

Black market Wealth inequalities Negative externalities

Question 62

GDP growth rates in LEDCs

Answer 62

Lower and more volatile | Doesn't take into account diseases

Question 63

Alternative to measuring GDP growth, national happiness

Answer 63

Objective measures: incomes, unemployment, life expectancy | Subjective measures: surveys, job security

Question 64

Pros of HDI as a measure of living standards

Answer 64

broader perspective easier to compare uses education and health so more accurate

Question 65

Cons of HDI as a measure of living standards

Answer 65

PPP values volatile little sense of income distribution difficult to measure human development