macro 3.1- measuring economic activity and illustrating its variations

Question 1

draw the circular flow of income

Answer 1

elsewhere

Question 2

define GDP

Answer 2

the value of total output produced in an economy over a period of time.

Question 3

define GNI

Answer 3

the value of total output produced in an economy over a period of time and net income from abroad taken into account

Question 4

state the equation linking GDP and GNI

Answer 4

GNI = GDP + net income from abroad

Question 5

state 3 ways in which GDP can be measured

Answer 5

1. Income: Wages + Rent + Interest + Profit
2. Output: sum of 1st, 2nd, 3rd sectors’ outputs
3. Expenditure: C + I + G + (X – M)

Question 6

give and explain the equation for GDP using the expenditure approach

Answer 6

C + I + G + (X – M)
GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)

Question 7

what are real GDP and GNI?

Answer 7

Real GDP and GNI is the value of total output produced in an economy over a one year period - and adjusted for inflation

Question 8

give equation for real GDP

Answer 8

real GDP= nominal GDP/GDP deflator x 100

Question 9

give the equation for real GDP per capita

Answer 9

Real GDP per capita = Real GDP / the population

Question 10

define and explain purchasing power parity

Answer 10

a conversion factor applied to GDP and GNI

the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries

The aim of PPP is to help make a more accurate standard of living comparison between countries where goods/services cost different amounts

Question 11

give a theoretical example of PPP

Answer 11

If a basket of goods costs $150 in Vietnam (once the currency has been converted) and the same basket of goods costs $450 in the USA, the purchasing power parity would be 1:3
It seems like the cost of living is much higher in the USA
However, if the USA’s GNI/capita is more than three times higher than the GNI/capita of Vietnam, it could be argued the USA has better standards of living
Conversely, if the GNI/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services

Question 12

draw and label a business cycle diagram

Answer 12

elsewhere

Question 13

give 3 reasons why national income statistics are useful for making comparisons between countries

Answer 13

• They provide insights into the effectiveness of government policies
• They allow judgments to be made about the relative wealth and standard of living within each country
• They allow comparisons to be made over the same or different time periods

Question 14

why is real GDP a better comparison than nominal GDP?

Answer 14

One country may have a much higher rate of economic growth, but also a much higher rate of inflation.

Question 15

why does real GDP per capita provide better information than real GDP?

Answer 15

it takes population differences into account

Question 16

compare GNI and GDP

Answer 16

Using real GNI/capita is a more realistic metric for analysing the income available per person than GDP/capita

Question 17

Limitations of Using GDP data to Compare Living Standards Between Countries and over time

Answer 17

• Lack of information provided on inequality
• Quality of goods/services
• Does not include unpaid/voluntary work
• Environmental factors (creation of externalities)

Question 18

give 3 other ways in which national living conditions can be measured

Answer 18

The OECD Better Life Index
The Happiness Index
The Happy Planet Index

Question 19

3 other ways of measuring national living standards

Answer 19

The OECD Better Life Index
The Happiness Index
The Happy Planet Index

Question 20

happy planet index

Answer 20

wellbeing x life expectancy / ecological footprint