national income chapter 11

Question 1

what are the 4 phases of the business cycle ?

what are the causes of expansion , boom/peak, contraction and trough ?

Answer 1

expansion/boom - peak - contraction/recession - trough - expansion

causes of expansion - 1.economic growth, 2.optimistic consumers and investors spend more time, increasing circular flow. 3.low interest rates encourage both consumption and investment

boom/peak - 1. inflation is high- demand pull - supply can’t increase as at full employment 2. asset bubbles emerge- speculation and investment has driven up prices 3.raising interest rates may help slow down the boom

contraction 1. negative future expectations - fall in investment/spending 2. credit can dry up- less loans means less investment/spending

trough 1.the lowest point of the downward movement- hard to identify at the time

Question 2

what is national income ?

Answer 2

the income accruing to the permanent residents of a country from economic activity over a time period

Question 3

what is economic growth ?

Answer 3

an increase in national income (GDP) over a time period

Question 4

what is a recession ?

Answer 4

when national income (GDP) falls for two consecutive quarters

Question 5

methods of calculating national income 1. the output method

Answer 5

involves adding the value of all output(goods and services) produced by all firms in the economy. it is important to avoid double counting. “double counting” occurs if the expenditure on intermediate goods is included in the calculation of national output.

higher output = higher standard of living

Question 6

methods of calculating national income 2. the income method

Answer 6

involves adding up all the income earned (rent, wages, interest and profits) from supplying factors of production (land, labour, capital and enterprise) in a country in a period of time

Question 7

methods of calculating national income 3. expenditure method

Answer 7

involves adding the total amount of money spent on (final) goods and services in the country during the year. this is taken from the amount spent by consumers, firms and the government, adding the value of exports and subtracting the value of imports.

this is the most important method for calculating national income and the most commonly used

Question 8

what is economic growth ( a rightward shift of the AD curve

Answer 8

economic growth can also be represented graphically. if aggregate demand increases (consumer income increases) this leads to an outward shift in AD

as such, Real GDP increases but at the same time so does the price level( inflation)

aggregate demand (AD) - the total demand for an economy’s goods and services at a given price level at a given period

aggregate supply (AS) - the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period

Question 9

what are the positives of economic growth ? (5)

Answer 9

1.increased employment- if more goods and services are being produced, firms will have to hire more workers to create this output, increasing the number of people in work

2.imporved gov finances - gov revenue will increased from more direct taxes (PAYE) and indirect taxes (VAT) as a result of increased employment and production

3. improved balance of payments - if an economy produces more goods and services, they will export more of their output, increasing exports/ B of P
4. improved standard of living - an increase in AD will result in higher wages to workers, and thus higher disposable incomes, as firms profits will increase
5. decreased emigration - reduced “brain drain” as there will be fewer residents feeling that they have to leave the country as there will be more job opportunities

Question 10

what are the negatives of economic growth (4)

Answer 10

1. inflationary pressure - as AD increases, this will lead to excess demand for all goods and services which pushes up the price level ( demand pull inflation)
2. use of scarce resources - unsustainable practices such as consuming fossil fuels or other non-renewable resources may be needed for economic growth, damaging the environment
3. increased demand for imports - if AD increases, consumers incomes will also increase. thus, they will import more goods and services (MPM)
4. uneven distribution of wealth - as AD increases, firms will earn more in profit. however, this may not be passed on to workers proportionally leading to a growing divide between rich and poor.

Question 11

the expenditure method - formula and explanation of each factor

Answer 11

AD/Y = C+I+G+(X-M)

C- consumer expenditure - consists of spending by households on goods and services know as consumption

I - investment - spending by the private sector on capital goods eg building

G- gov spending - gov spending on goods and services eg health

(X-M) net exports - the difference between the value of exports of goods and services and the value of imports of goods and services

Question 12

the expenditure method - what factors impact C consumption

Answer 12

levels of incomes - as incomes rise, the level of spending tends to rise

MPC - the higher the MPC , the higher the level of spending

availability of credit - as credit becomes more easily available the level of spending will rise

rate of interest - higher interest rates means borrowing falling and spending

rates of taxation - if these increase, disposable incomes fall and so will spending

consumer confidence - the less confident consumers are about the future the less likely they are to spend

Question 13

the expenditure method - what factors impact I investment

Answer 13

rate of interest/MEC - as interest rise, borrowing becomes more expensive and investments tend to fall

expectations of business people - are they optimistic about the future? does gov policy favour risk taking, are levels of taxation conducive to risk taking

Question 14

the expenditure method - what factors impact G government expenditure

Answer 14

primarily depends on the political decisions of the government and the type of fiscal policy being pursued by the state.

Question 15

the expenditure method - what factors that impact exports X

Answer 15

income levels in our export markets - if high then the demand for Irish exports may increase

competitiveness of Irish exports - levels of domestic inflation vs international rates. if our goods are competitive on export markets then demand may increase

value of euro in relation to other countries - eg the US dollor/ Pound sterling

Question 16

the expenditure method - what factors that impact imports

Answer 16

levels of incomes - as incomes rise the level of spending on imports tend to rise

MPM - the higher the MPM the higher will be demanded for imports

value of euro in relation to other countries

Question 17

what is the definition of gross domestic product

Answer 17

it is define as the total value of the output produced by the factors of production in the domestic economy irrespective of whether the factors are owned by Irish nationals or foreigners

Question 18

what is the definition of gross national product ?

Answer 18

it is defined as the total value of goods and services produced by Irish owned factors of production in Ireland and elsewhere. it is a measure of the income accruing to a country’s residents

Question 19

what is the difference between GDP and GNP

Answer 19

the difference between GDP and GNP in NFIA (net factor income from abroad)- income earned by Irish factors earned abroad sent home minus foreign income earned in Ireland repatriated out of Ireland - it is a large negative figure for Ireland

eg repatriation of profits by MNC’s
repayment of interest on national debt
remittance payments from immigrants in Ireland

Question 20

what is gross national income (GNI)

Answer 20

it measures the total income earned by a country’s residents and businesses regardless of where that income is earned

it includes EU subsidies ( a source of income from abroad) and deducts EU taxes ( taxes paid by Ireland to the EU )

Question 21

what is modified gross national income (GNI*)

Answer 21

it is an economic measure that takes into account certain adjustments to gross national income to provide a more accurate reflection of a country’s economic well-being

it removes the following figures (adjustments) that would otherwise distort and overestimate Ireland’s national income each year.

1. factor income of redomiciled firms
2. depreciation on R&D imports and trade in IP
   3.depreciation on aircraft leasing

Question 22

how are national income figures calculated ?

Answer 22

1. gross domestic product (GDP) at current market prices (CMP)
   +/- net factor income from abroad
   |
2. gross national product (GNP) at current market prices
   +EU subsidies
   -EU taxes
   |
3. gross national income (GNI) at current market prices
   -adjustments
   |
4. modified GNI at current market prices

Question 23

the circular flow of income - households

Answer 23

households supply the factors of production (land, labour, capital and enterprise) to firms. Firms ay for these factors in the form of rent, wages, interest and profit. with this income Y households can now buy the output of firms

Question 24

the circular flow of income - firms

Answer 24

firms supply employment for households in which they will be rewarded for their labour, in producing the output, through wages. this income Y can now be spent in the economy.

Question 25

the circular flow of income - what are injections and leakages

Answer 25

injections - are additions to the circular flow of income

leakages - are withdrawals from the circular flow of income

Question 26

injections - increase in circular flow
examples

Answer 26

gov spending - all money spent by the government both current and capital

investment expenditure - money invested by individuals, financial institutions and businesses on capital goods

exports - money spent by foreign individuals on goods/services produced within ireland

Question 27

leakages - decrease the circular flow
examples

Answer 27

taxation - contributions required by persons, groups or businesses for the support of a government

savings - the proportion of incomes not spent

imports - money spent by Irish citizens on goods/services produced outside Ireland

Question 28

what is the multiplier ?

Answer 28

it shows the relationship between an initial injection into the circular flow of income and the eventual total increase in national income resulting from this increase

eg if €50m was injected into an economy with a multiplier of 1.5, the overall increase in National Income would be the injection X multiplier so €5o X 1.5 =€ 75m increase

Question 29

what are the uses on national income statistics ?

Answer 29

1. indication of alternations in our standard of living - shows economic growth used by trade unions to justify increased wage demand
2. means of comparing standard of living in different countries- shows which economies are growing the fastest, can compare policies to adjust to try to grow the economy quicker by gov

3.assists the gov in formulating economic policies - it provides a benchmark for which progress can be monitored by government, it assesses performance and changes of different sectors of our economy

4. Eu budget contributions- national income statistic will determine the contribution Ireland must make to the EU budget, and which countries require aid

Question 30

what are the limitations of national income statistics

Answer 30

1. should be done on a per capita basis - more meaningful measure of living standards
2. inflation levels in countries - an increase in prices will increase national income but standard of living may fall

3.distribution of national income and poverty within each country - two countries may have the same GDP figure, but one may have a very high poverty rate

4. size of black economy - the value of underreported transactions is difficult to ascertain, thus underestimating the level of national income as those are included in the national income statistics
5. nature of gov spending - a country may have a lower military budget and a higher budget on health and education increasing the standard of living in comparison with a country with a reverse case

Question 31

what is the economic and social impacts of the hidden economy

Answer 31

1. legitimate retailers lose out on sales - black market cigarettes
2. loss of jobs in legitimate businesses- lower sales means lower demand for labour, lost gov revenue and increased social welfare payments
3. reduced gov revenue- sales of certain goods include indirect taxes (VAT and SSDT, and certain excise duties) on the black market these taxes are not collected
4. increased gov spending on regulation - inspectors are required, gardai resources and there is an opportunity cost as a result
5. health and safety - worse for workers and consumers, lower production standards eg counterfeit cigarettes