Unit 3.1 - Measuring economic activity and illustrating its variations

Question 1

National income

Answer 1

Total value of the final output of all goods/services produced in a country in one year

Question 2

Gross Domestic Product (GDP)

Answer 2

The total money/market value of all final goods/services produced in an economy in a given time period, which is usually one year

C + I + G + (X - M)

Question 3

Why do we measure economic activity?

Answer 3

1. To assess the economy’s performance over time
2. To determine the need and effectiveness for policies in achieving macroeconomic objectives
3. To allow comparisons of income and output with other economies

Question 4

Circular flow of income

Answer 4

A simplified model of the economy that shows the flow of money through the economy

Question 5

Gross National Income/Product (GNI/GNP)

Answer 5

The total money/market value of all final goods/services produced in an economy in one year, PLUS net property from abroad (interest, rent, dividends, profit)

GNP/GNI = GDP + NIA

Question 6

How to calculate NIA (Net income from abroad)

Answer 6

NIA = Income from abroad - Income to abroad

Question 7

Real GDP

Answer 7

The total money/market value of all the final goods/services produced in an economy during a given time period, which is usually one year, ADJUSTED FOR INFLATION

Question 8

Real GNI/GDP

Answer 8

The total money/market value of all final goods/services produced in an economy in one year, plus net property income from abroad (rent, interest, dividends, profits), ADJUSTED FOR INFLATION

Question 9

Nominal GDP vs Real GDP

Answer 9

Nominal GDP is GDP which is NOT adjusted for inflation, and is measured with CURRENT PRICES, which are the prevailing prices at the time of measurement

Real GDP = (Nominal GDP x 100) / GDP deflator

Question 10

Real GDP per capita

Answer 10

Real GDP divided by the total population of the country

Question 11

Real GNI per capita

Answer 11

Real GNI divided by the total population of the country

Question 12

Total GDP vs GDP per capita: drawbacks + advantages?

Answer 12

Total GDP:

✅ comparing the sizes of different economies as wholes

❌ comparing living standards due to differing population sizes

Question 13

Purchasing Power Parity (PPP)

Answer 13

A theory which states that the exchange rates between currencies is in equilibrium when their purchasing power is the same in each of the two countries.

PPPs equalise the purchasing powers of different currencies by ELIMINATING THE DIFFERENCES IN PRICE LEVELS BETWEEN COUNTRIES. It equates cost of living across countries

Question 14

Business cycle

Answer 14

A diagram showing the periodic/cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases:

1. Recovery
2. Boom
3. Slowdown
4. Recession

The diagram refers to the periodic fluctuations in ACTUAL GDP around POTENTIAL GDP (with respect to time)

Question 15

What are the four phases of economic growth (business cycle)

Answer 15

1. Recovery
2. Boom
3. Slowdown
4. Recession

Question 16

What are the four stages in a business cycle

Answer 16

1. Recovery
2. Peak
3. Recession
4. Trough

Question 17

Economic well-being

Answer 17

A multidimensional concept relating the level of prosperity and quality of living standards in a country

Question 18

Appropriateness of using GDP or GNI statistics to measure economic well-being — use of national income statistics for making

Answer 18

1. Comparisons between countries
2. Comparisons over time

Question 19

Merits of GDP

Answer 19

1. High correlation with other quality of life indicators
2. High correlation with living standards
3. Widely available, frequently measured, consistent
4. Definition of GDP is consistent across countries, therefore allowing cross-country comparisons

Question 20

Demerits of GDP

Answer 20

1. Ignores non-market output, informal and underground economy
2. Quality improvements of goods/services over time
3. Composition of GDP
4. Per capita GDP ignores inequality
5. Different population sizes/population growth ignored

Question 21

Alternative measures of well-being

Answer 21

1. OECD Better Life Index
2. Happiness Index
3. Happy Planet Index

Question 22

OECD Better Life Index

Answer 22

An index to compare well-being across countries, based on 11 topics that the OECD has identified as essential, in the areas of material living conditions and quality of life

11 topics reflect what the OECD believe are essential to well-being in terms of MATERIAL LIVING CONDITIONS + QUALITY OF LIFE

Question 23

Happiness Index

Answer 23

An index which is used to measure the collective happiness and well-being of a population

It is a composite index put together by the UN. Main variables are GDP PER CAPITA, SOCIAL SUPPORT, HEALTHY LIFE EXPECTANCY, FREEDOM TO MAKE CHOICES ETC.

Question 24

Happy Planet Index (HPI)

Answer 24

An index that combines FOUR ELEMENTS to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. Takes sustainability into account

1. Well-being
2. Life expectancy
3. Inequality of outcomes
4. Ecological footprint

Question 25

What are the FOUR elements taken into account by the Happy Planet Index (HPI)

Answer 25

1. Well-being
2. Life expectancy
3. Inequality of outcomes
4. Ecological footprint