MACRO - LS10 - Economic Growth (Part 3)

Question 1

GDP

Answer 1

• The total value of output produced in a given time period
• GDP includes the output of foreign owned businesses that are located in a nation following foreign direct investment

Question 2

GNI

Answer 2

• measures the final value of incomes flowing to UK owned factors of production whether they are located in the UK or overseas
  GNI = GDP + payments by foreign nationals into the country for such things as investments (interest and dividends), less similar payments paid out of the country

Question 3

Limitations of GDP and GNI

Answer 3

• Does not accurately measure the ‘true’ value of output produced in an economy
• Standards of living are closely related to additional factors that both GDP and GNI are unable to account for
• GDP and GNI figures may be misleading especially in making comparisons over time or between countries.

Question 4

Why GDP/GNI do not accurately measure the ‘true’ value of output?

Answer 4

• doesn’t include non-marketed output
• doesn’t include output sold in underground (parallel) markets
• GDP & GNI are differing domestic price levels

Question 5

doesn’t include non-marketed output

Answer 5

• some output of goods & services is not sold in market - doesn’t generate income
• e.g. carrying out repairs on your own home, growing food for your own consumption
• many countries try to get an estimate of non-marketed output and add to marketed output to get closer approximation of ‘true’ GDP/GNI

Question 6

Doesn’t include output sold in underground (parallel) markets

Answer 6

• does generate income but it’s not recorded so it’s not included in GDP/GNI
• ‘underground markets’ easier when buying/selling transaction goes unrecorded
• can make estimates and add to official figures to get closer value of ‘true’ GDP/GNI
• can be unreported income to avoid tax
• or selling at higher price then legal limit
• selling illegal goods/services - e.g. drugs

Question 7

GDP/GNI and differing domestic price levels

Answer 7

• goods and services sell for different prices in different countries
• country that has lower price has higher purchasing power
• purchasing power - quantity of goods/services that can be brought with money
• the country that has higher PP has higher standard of living
• GDP/GNI doesn’t account for this, causes misleading picture of standard of living - can be dealt with by converting into single common currency - purchasing power parity

Question 8

Why measures of GDP/GNI cannot measure standards of living?

Answer 8

• GDP and GNI do not account for quality of life factors
• GDP and GNI cannot reflect achievements in levels of education, health and life expectancy
• GDP and GNI provides no information on the distribution of income and output
• GDP and GNI doesn’t consider increased leisure
• GDP and GNI make no distinction about composition of output
• GDP and GNI doesn’t take into account depletion of natural resources
• GDP and GNI doesn’t consider quality improvements in goods/services

Question 9

GDP and GNI do not account for quality of life factors

Answer 9

• well-being depends on other factors like crime rates, peace, relations with other countries, stress levels & political freedom
• GDP & GNI can’t account for any of these

Question 10

GDP and GNI cannot reflect achievements in levels of education, health and life expectancy

Answer 10

• health & education standards contribute to living standards
• not accounted for in GDP & GNI
• doesn’t consider increased life expectancy
• human & development index can be seen as better alternative measure

Question 11

GDP and GNI provides no information on the distribution of income and output

Answer 11

• doesn’t show if wealth, income is evenly distributed or only benefits the richest in society and not average households
• shows average output only
• doesn’t show if inequality is increasing/decreasing

Question 12

GDP and GNI doesn’t consider increased leisure

Answer 12

• many countries have had a decrease in hours worked and leisure hours increasing
• contributes to living standards but not shown in GDP/GNI

Question 13

GDP and GNI make no distinction about composition of output

Answer 13

• countries produce military goods, merit goods (education, healthcare) and other goods
• GDP/GNI considers value of all but doesn’t distinguish between the degree that they contribute to living standards
• countries may have lower GDP per capita but higher social services and living standards

Question 14

GDP and GNI doesn’t take into account depletion of natural resources

Answer 14

• depletion of natural resources reduces well -being but it isn’t considered

Question 15

GDP and GNI doesn’t consider quality improvements in goods/services

Answer 15

• products quality improve over time but this isn’t taken into account when calculating total value of output
• tech advances means products can be sold at lower prices - benefits consumers but not shown in figures

Question 16

Comparisons between countries

Answer 16

• as GDP/GNI can’t measure true output value, it limits validity of international comparisons
• may be high GDP per capita in a country but concentrated among few people compared to lower level in another country that’s more evenly distributed
• different domestic price levels can be misleading

Question 17

Income and wealth

Answer 17

• correlation between national income and national wealth
• but isn’t a perfect correlation as wealth can be mismanaged and misused

Question 18

National income, economic welfare & happiness

Answer 18

• with low income levels, an increase, causes happiness to increase as meets basic needs
• with high levels, increase doesn’t have much of an effect as needs already met
• Easterlin Paradox - some economists dispute this
• surveys consistently show that those with above average incomes tend to be happy then those with below average incomes
• so if everyone’s income doubles, no change to happiness, if an individual incomes doubles then increase in happiness - as higher income relative to everyone else

Question 19

Two suggested reasons for correlation between relative income and happiness

Answer 19

• income is symbol of social status - happier psychologically if higher social status - innate
• above average incomes correlated with other factors which are associated with happiness
  E.g. better health and life expectancy, less likely to be unemployed etc….