3.1 Measuring Economic Activity (DP IB Economics: HL): Flashcards
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Define national income accounting.
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Define national income accounting.
National income accounting measures the economic activity within a country and provides insight into how the country is performing.
Define gross domestic product (GDP).
Nominal GDP is the value of all goods and services produced in an economy in a one-year period.
Define injections.
Injections add money to the circular flow of income and increase its size, and consist of government spending, investment and exports.
What are the three injections into the circular flow of income?
The three injections are government spending (G), investment (I) and exports (X).
Define leakages.
Leakages (withdrawals) remove money from the circular flow of income and reduce its size, and consist of savings, taxation and imports.
When withdrawals are greater than injections, the economy experiences economic and a fall in national income.
When withdrawals are greater than injections, the economy experiences economic decline and a fall in national income.
What happens to national income when injections exceed withdrawals?
When injections exceed withdrawals, the economy experiences economic growth and an increase in national income.
What is the formula for GDP using the expenditure approach?
Using the expenditure approach, GDP = C + I + G + (X − M).
Define consumption.
Consumption is the total spending on goods and services by consumers (households) in an economy.
True or False?
Government spending in GDP includes transfer payments.
False.
Government spending in GDP excludes transfer payments; it covers items such as public sector salaries and the provision of merit and public goods.
What is the formula for national income using the income approach?
Using the income approach, National Income = W + R + I + P (wages, rent, interest and profit).
In the expenditure approach, net exports are calculated by subtracting from exports.
In the expenditure approach, net exports are calculated by subtracting imports from exports.
Why do all three approaches to calculating national income produce the same figure?
They produce the same figure because one agent's expenditure is another agent's income, and the value of finished goods equals the expenditure paid to acquire them.
True or False?
The value of GDP and the volume of GDP mean the same thing.
False.
The value of GDP is its monetary worth, whereas the volume is the physical number of goods and services produced.
Define gross national income (GNI).
Gross national income (GNI) measures nominal GDP plus the net factor income earned from abroad.
How does GNI differ from GDP?
GNI equals GDP plus net factor income from abroad, whereas GDP only measures production within a country's borders.
Define nominal GDP.
Nominal GDP is the value of all goods and services produced in an economy in a one-year period, not adjusted for inflation.
Define real GDP.
Real GDP is the value of all goods and services produced in an economy in a one-year period, adjusted for inflation.
In economics, the term refers to a metric that has not been adjusted for inflation.
In economics, the term nominal refers to a metric that has not been adjusted for inflation.
What is the GDP deflator used for?
The GDP deflator is used to convert nominal GDP or GNI from current prices to constant prices.
True or False?
'GDP at constant prices' refers to nominal GDP.
False.
'At constant prices' refers to real GDP, which has been adjusted for inflation.
What is the formula for real GDP using the GDP deflator?
Real GDP = (Nominal GDP / GDP deflator) × 100.
Real GNI is calculated as real GDP plus net from abroad.
Real GNI is calculated as real GDP plus net income from abroad.
How is real GDP per capita calculated?
Real GDP per capita = Real GDP / population.
Why is real GDP per capita a useful measure?
Real GDP per capita shows the mean wealth of each citizen, making it easier to compare standards of living between countries.
Define purchasing power parity (PPP).
Purchasing power parity (PPP) is a conversion factor that calculates the relative purchasing power of different currencies.
What is the aim of purchasing power parity (PPP)?
The aim of PPP is to make a more accurate standard-of-living comparison between countries where goods and services cost different amounts.
True or False?
Real GDP per capita provides a better comparison of living standards than real GNI per capita.
False.
Real GNI per capita provides a better comparison of living standards, as it also captures net income earned from abroad.
Define business cycle.
The business cycle refers to the fluctuations in real GDP that occur in an economy over time.
What are the four stages of the business cycle?
The four stages are boom (peak), slowdown (downturn), recession and recovery.
Real GDP fluctuates above and below the long-term rate of growth.
Real GDP fluctuates above and below the long-term trend rate of growth.
Define recession.
A recession occurs when there are two or more consecutive quarters (six months) of negative economic growth.
What is a positive output gap?
A positive output gap is where the growth of real GDP is above the long-term trend.
A recession occurs when there are two or more consecutive quarters of economic growth.
A recession occurs when there are two or more consecutive quarters of negative economic growth.
Define negative output gap.
A negative output gap is where the growth of real GDP is below the long-term trend, indicating spare production capacity.
True or False?
During a boom, unemployment tends to rise.
False.
During a boom, unemployment tends to fall while job vacancies increase.
What typically happens to inflation during a boom?
During a boom, the rate of inflation increases, usually demand-pull inflation.
Define boom.
A boom is a period of high or increasing rates of economic growth, with falling unemployment and rising inflation.
How can a government moderate the business cycle?
A government can moderate the cycle through intervention, such as increasing taxes in a boom or increasing spending in a recession.
True or False?
The business cycle shows the fluctuations of real GDP around the long-term trend rate of growth.
True.
The business cycle illustrates how real GDP (actual growth) fluctuates around the long-term trend rate of growth.
What happens to the government budget during a boom?
During a boom the government budget improves, as tax revenues rise and expenditure falls.
What can national income statistics be used to compare?
They can be used to compare the relative wealth and standard of living within and between countries, and over different time periods.
Why is real GDP a better basis for comparison than nominal GDP?
Real GDP is better because it is adjusted for inflation, avoiding distortion when countries have different inflation rates.
Define real GNI per capita.
Real GNI per capita measures the income actually available per person within a country's borders, adjusted for inflation.
True or False?
Developing countries often have a higher GNI than GDP.
False.
Developing countries often have a higher GDP than GNI (by as much as 6%), as multinational companies send income home.
In developing countries, GDP is often higher than GNI because multinational companies send income and home.
In developing countries, GDP is often higher than GNI because multinational companies send income and profits home.
Why is real GDP per capita more useful than real GDP for comparisons?
Real GDP per capita is more useful because it takes population differences into account.
GDP per capita presents income as an , so it provides little information on income inequality within a country.
GDP per capita presents income as an average, so it provides little information on income inequality within a country.
How does the quality of goods and services limit GDP data?
GDP provides no information on changes in the quality of goods and services over time, so living standards can be mis-judged.
True or False?
GDP includes the value of unpaid and voluntary work such as family childcare.
False.
GDP excludes unpaid and voluntary work; if it were included, GDP per capita would be higher.
Why do differences in hours worked limit GDP comparisons?
GDP does not capture the amount of time taken to produce output, so a country producing the same income in less time actually has higher living standards.
How do environmental factors limit GDP as a measure of well-being?
GDP does not capture the environmental and health externalities created when generating income, overstating living standards where externalities are high.
Why have alternative measures of well-being been developed?
They have been developed because of the limitations of national income statistics in measuring well-being and comparing living standards.
Define the Easterlin Paradox.
The Easterlin Paradox states that happiness and income have a direct relationship up to a point, beyond which the relationship becomes less evident.
Name the three alternative measures of well-being covered in the note.
The three are the OECD Better Life Index, the Happiness Index and the Happy Planet Index.
National income statistics tend to present positive data, while national happiness surveys yield more data.
National income statistics tend to present positive data, while national happiness surveys yield more normative data.
While GDP focuses on production, what does happiness focus on?
Happiness focuses on health, relationships, the environment, education, satisfaction at work and living conditions.
Define the OECD Better Life Index.
The OECD Better Life Index measures the well-being of citizens across the OECD's member countries using 11 variables.
True or False?
The OECD Better Life Index measures well-being using GDP per capita alone.
False.
The Better Life Index uses 11 variables such as housing, income, jobs, health and work-life balance, not GDP alone.
What does the Happy Planet Index (HPI) attempt to measure?
The HPI measures sustainable well-being — how efficiently countries deliver long, happy lives using scarce resources sustainably.
The HPI score is calculated as wellbeing multiplied by life expectancy, divided by footprint.
The HPI score is calculated as wellbeing multiplied by life expectancy, divided by ecological footprint.
What three variables does the Happy Planet Index use?
The HPI uses well-being, life expectancy and ecological footprint.
True or False?
A country with more environmental degradation scores higher on the Happy Planet Index.
False.
Countries with a lower ecological footprint score higher, so more environmental degradation lowers the score.
What is the Happiness Index?
The Happiness Index is a survey that measures happiness across 10 different areas of a person's life.
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