3.1 Measuring Economic Activity (DP IB Economics: SL): Flashcards
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Define nominal GDP.
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Define nominal GDP.
Nominal GDP is the value of all goods and services produced in an economy in a one-year period.
What does national income accounting measure?
National income accounting measures the economic activity within a country and provides insights into how it is performing.
Define injections.
Injections add money to the circular flow of income and increase its size, and consist of government spending, investment and exports.
True or False?
The injections into the circular flow of income are government spending, savings and exports.
False.
Injections are government spending (G), investment (I) and exports (X); savings is a leakage, not an injection.
Define leakages.
Leakages (withdrawals) remove money from the circular flow of income and reduce its size, and consist of savings, taxation and imports.
The three leakages from the circular flow of income are savings, taxation and .
The three leakages from the circular flow of income are savings, taxation and imports.
What happens to national income when injections exceed withdrawals?
When injections exceed withdrawals there is economic growth and an increase in national income.
What are the three approaches to calculating national income?
National income can be calculated using the expenditure, income and output approaches.
Define the income approach to national income.
The income approach adds up the payments to the factors of production in a year: wages (W), rent (R), interest (I) and profit (P).
What is the formula for nominal GDP using the expenditure approach?
Using the expenditure approach, nominal GDP = C + I + G + (X − M).
Using the income approach, national income = wages + rent + interest + .
Using the income approach, national income = wages + rent + interest + profit.
Why do all three approaches to calculating national income give the same figure?
They give the same figure because one agent's expenditure is another agent's income, so the value of finished goods equals the expenditure paid to acquire them.
Define net exports.
Net exports are the difference between the revenue gained from selling goods and services abroad (exports) and the expenditure on goods and services from abroad (imports).
Does government spending in GDP include transfer payments?
No, government spending in GDP does not include transfer payments.
True or False?
The value of GDP and the volume of GDP measure the same thing.
False.
The value of GDP is its monetary worth, whereas the volume of GDP is the physical number of goods and services produced.
Define gross national income (GNI).
Gross national income (GNI) is nominal GDP plus the net factor income earned from abroad.
Why can GNI be more relevant than GDP for a country hosting many multinational corporations?
GNI is more relevant because a multinational's profits are counted in GDP even though they are usually sent abroad, so GNI adjusts for the net income earned from abroad.
Define the term nominal in economics.
Nominal means that the metric has not been 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.
True or False?
Nominal GDP is adjusted for inflation.
False.
Nominal GDP is not adjusted for inflation; it is real GDP that is 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.
Real GDP = (Nominal GDP ÷ GDP deflator) × .
Real GDP = (Nominal GDP ÷ GDP deflator) × 100.
What is the formula for real GNI?
Real GNI = Real GDP + net income from abroad.
How is real GDP per capita calculated?
Real GDP per capita = real GDP ÷ the population.
What does real GDP per capita show?
Real GDP per capita shows the mean wealth of each citizen, making it easier to compare standards of living between countries.
True or False?
Real GNI per capita provides a better comparison of living standards between countries than real GDP per capita.
True.
Real GNI per capita gives a better comparison of living standards because it also captures the net income a country's citizens earn from abroad.
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 using 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.
When an exam question refers to GDP 'at constant prices', it is referring to GDP.
When an exam question refers to GDP 'at constant prices', it is referring to real GDP.
Define business cycle.
The business cycle refers to the changes in real GDP (actual growth) that occur in an economy over time.
What are the four stages of the business cycle?
The four stages of the business cycle 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.
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 positive output gap.
A positive output gap is the growth of real GDP that is above the long-term trend rate of growth.
What is a negative output gap?
A negative output gap is the growth of real GDP that is below the long-term trend rate of growth.
True or False?
During a boom, unemployment tends to rise.
False.
During a boom, unemployment tends to decrease and job vacancies increase.
What typically happens to inflation during a boom?
During a boom the rate of inflation typically increases, and it is usually demand-pull inflation.
What happens to the government budget during a boom?
The government budget improves during a boom as tax revenues rise and expenditure falls.
How might a government use fiscal policy to moderate a recession?
A government can moderate a recession by increasing government spending (and, conversely, by increasing taxes during a boom).
True or False?
Every firm performs badly during a recession.
False.
Some firms can thrive during a recession as consumers switch to purchasing inferior goods (e.g. Lidl).
Why is real GDP a better basis for comparison than nominal GDP?
Real GDP is adjusted for inflation, so it gives a better comparison when one country has both higher economic growth and higher inflation.
Real GDP per capita is a better measure than real GDP because it takes differences into account.
Real GDP per capita is a better measure than real GDP because it takes population differences into account.
Define real GNI per capita.
Real GNI per capita is a measure of the income available per person in a country, and is a more realistic metric for this than real GDP per capita.
True or False?
National income statistics can only be used to compare living standards at a single point in time.
False.
National income statistics also allow comparisons to be made over different time periods, not just at a single point in time.
True or False?
Developed countries tend to have a larger gap between their GNI and GDP than developing countries.
False.
Developed countries tend to have a smaller gap between GNI and GDP, while developing countries often have a higher GDP than GNI.
In developing countries, GDP can be higher than GNI by as much as %.
In developing countries, GDP can be higher than GNI by as much as 6%.
GDP data does not capture the amount of taken to produce output, so a country generating the same income more quickly has a higher standard of living.
It is usually because multinational companies involved in resource extraction send their income and profits back home.
Why does GDP per capita give limited information about inequality?
GDP per capita is an average, so it hides the significant differences in living standards that can exist within the same country.
True or False?
GDP data captures changes in the quality of goods and services over time.
False.
GDP provides no information on the increase or decrease in the quality of goods and services over time.
Give an example of activity that raises living standards but is excluded from GDP.
Unpaid or voluntary work, such as family childcare provision, raises living standards but is not recorded in GDP.
GDP data does not capture the amount of taken to produce output, so a country generating the same income more quickly has a higher standard of living.
GDP data does not capture the amount of time taken to produce output, so a country generating the same income more quickly has a higher standard of living.
Why can GDP overstate living standards when comparing countries with different environmental impacts?
GDP does not capture the environmental and health impacts (externalities) of generating income, so a country with fewer externalities actually enjoys a higher standard of living.
Name the three alternative measures of well-being covered in this subtopic.
The three alternative measures are the OECD Better Life Index, the Happiness Index and the Happy Planet Index.
Define the Easterlin Paradox.
The Easterlin Paradox states that happiness and rising income have a direct relationship up to a point, beyond which the relationship becomes less evident.
True or False?
National income statistics tend to yield more normative data than national happiness surveys.
False.
National income statistics tend to present more positive data, whereas national happiness surveys yield more normative data.
GDP focuses on production; what does 'happiness' tend to focus on instead?
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 38 member countries using 11 variables.
The OECD Better Life Index rates countries on variables considered essential to well-being.
The OECD Better Life Index rates countries on 11 variables considered essential to well-being.
Other than income, give examples of the dimensions the OECD Better Life Index measures.
It also measures dimensions such as housing, jobs, education, environment, health, safety and work-life balance.
Define the Happy Planet Index (HPI).
The Happy Planet Index (HPI) measures sustainable well-being, ranking countries by how efficiently they deliver long, happy lives using the earth's scarce resources.
What three variables make up the Happy Planet Index?
The HPI is made up of wellbeing, life expectancy and ecological footprint.
The Happy Planet Index attempts to measure well-being.
The Happy Planet Index attempts to measure sustainable well-being.
True or False?
On the Happy Planet Index, a country with a larger ecological footprint scores higher.
False.
A country with a lower ecological footprint scores higher; more environmental degradation lowers the score.
What does the Happiness Index measure?
The Happiness Index is a survey that measures happiness across 10 different areas of a person's life.
Give examples of the areas assessed by the Happiness Index.
Examples include psychological well-being, health, social support, governance, material well-being and work.
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