Macro economics

Question 1

What are the 4 main macro economic indicators?

Answer 1

• Used to measure a country’s economic performance.
• Rate of economic growth.
• Rate of inflation.
• Level of unemployment.
• State of the balance of payments.

Question 2

How can economic growth be measured?

Answer 2

-By the change in national output over a period of time.

Question 3

What is national output and how is it measured?

Answer 3

• All the goods and services produced by a country.

- Usually measured by value, called GDP.

Question 4

How can output be measured?

Answer 4

• In two ways:
• Volume, adding up quantity of goods and services produced in a year.
• Value, calculating value (£billion) of all the goods and services produced in a year

Question 5

How can GDP be calculated?

Answer 5

• Adding up the total amount of national expenditure (aggregate demand) in a year or by adding up the total amount of national income earned in a year.
• In theory means, national output = national expenditure = national income

Question 6

What is the rate of economic growth?

Answer 6

-The speed at which the national output grows over a period of time. Over course of several years, speed of growth is not usually constant.

Question 7

What are booms?

Answer 7

-Long periods of high economic growth rates.

Question 8

What are recessions?

Answer 8

• Negative economic growth for two consecutive quarters (3 months).
• A long recession is called a slump

Question 9

What is an economic depression?

Answer 9

-Worse than recession, sustained economic downturn lasting for long period of time.

Question 10

What does it mean if a country’s GDP increases or decreases?

Answer 10

-Measures the change in the amount of goods and services produced between one year and the next.

Question 11

How can GDP be shown?

Answer 11

Two ways:

• Value.
• As a percentage.

Question 12

How do you measure economic growth over time as a percentage?

Answer 12

-Change in GDP / Original GDP x 100 = percentage change.

Question 13

What is nominal GDP?

Answer 13

• Some GDP growth may be due to prices rising.
• The name given to a GDP figure that hasn’t been adjusted for inflation giving the impression that GDP is higher than it is.

Question 14

What is real GDP?

Answer 14

-Economists remove the effect of inflation to find what’s called real GDP. For example, a 4% increase in the nominal GDP during a period when inflation was 3% means real GDP only rose by 1%. The other 3% was due to rising prices

Question 15

What can GDP be used to indicate?

Answer 15

• The standard of living in a country. This is done by dividing total national output by the country’s population to get the national output per person (GDP per capita).
• Higher the GDP per capita, higher the standard of living in a country.

Question 16

What is the formula for GDP per capita?

Answer 16

-Total GDP / population size = GDP per capita.

Question 17

What is GNI?

Answer 17

-Gross National Income, it is the GDP plus net income from abroad. This net income is any income earned by country on investments owned abroad minus any income earned by foreigners on investments domestically.

Question 18

What is GNP?

Answer 18

-Similar to GNI, total output of citizens of a country, whether or not they are resident in that country.

Question 19

What can GNP and GNI per capita be used to compare?

Answer 19

-Living standards between countries. Calculated in a similar way to GDP per capita dividing total GNI or GNP by country’s population.

Question 20

What is purchasing power parity?

Answer 20

• When using GDP per capita to compare living standards in countries that use different countries, exchange rate may not reflect true worth of two currencies, not giving an accurate picture.
• Purchasing power parity is the real value of an amount of money in terms of what you can actually buy with it. This varies in a country, e.g. a less developed country (Malawi) you are able to buy more goods with $1 than in a more developed country (Canada).

Question 21

What do you need to do when using PPP in comparisons of countries’ living standards.

Answer 21

• Involves adjusting the GDP per capita figures to take into account differences in purchasing power in those countries, results usually expressing in US dollars.
• Makes it more accurate and a easier comparison.

Question 22

What does GDP and GDP per capita compare?

Answer 22

• GDP and GDP per capita are used to compare the economic performance and standards of living in different countries.
• High GDP suggests country’s economic performance is strong.
• High GDP per capita suggests standard of living in a country is high.

Question 23

What are the limitations of GDP and GDP per capita?

Answer 23

Doesn’t take into account:

• Extent of hidden economy, economic activity that doesn’t appear in official figures.
• Public spending, some governments provide more benefits, unemployment benefits or free health care. E.g. two countries might have similar GDP per capita, but one country might spend much more money on a person or improve the standard of living.
• Extent of income inequality. Two countries might have similar GDP per capita, but distribution of income between rich and poor may be very different.