Exam code: 0455 & 0987
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Define gross domestic product (GDP).
Gross domestic product (GDP) is the monetary value of all goods and services produced in an economy in a one-year period.
What is the difference between nominal GDP and real GDP?
Nominal GDP is the actual value of all goods and services produced in a year without adjusting for inflation, while real GDP is adjusted for inflation.
If nominal GDP is £100bn and inflation is 10%, then real GDP is .
If nominal GDP is £100bn and inflation is 10%, then real GDP is £90bn.
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Define gross domestic product (GDP).
Gross domestic product (GDP) is the monetary value of all goods and services produced in an economy in a one-year period.
What is the difference between nominal GDP and real GDP?
Nominal GDP is the actual value of all goods and services produced in a year without adjusting for inflation, while real GDP is adjusted for inflation.
If nominal GDP is £100bn and inflation is 10%, then real GDP is .
If nominal GDP is £100bn and inflation is 10%, then real GDP is £90bn.
True or False?
Real GDP is a better metric for comparing economic growth across countries than nominal GDP.
True.
Real GDP is adjusted for inflation, allowing more accurate comparisons of growth between countries with different inflation rates.
What are the four main components of GDP as calculated by expenditure?
The four main components of GDP are consumption (C), investment (I), government spending (G), and net exports (X-M).
Define net exports.
Net exports are the difference between the value of exports and the value of imports in an economy. It is calculated as exports minus imports (X-M).
Define economic growth.
Economic growth is the increase in the output of goods and services in an economy over time, usually measured by the rise in real gross domestic product (GDP).
What is the difference between actual and potential economic growth?
Actual economic growth is an increase in output using existing resources, while potential economic growth is an increase in the economy’s productive capacity, allowing for more goods and services to be produced if all resources are used efficiently.
An increase in allows an economy to produce more goods and services in the long run.
An increase in resources allows an economy to produce more goods and services in the long run.
Define standard of living.
Standard of living refers to the level of wealth, comfort, material goods, and necessities available to a population.
List two advantages of economic growth.
Economic growth leads to increased incomes and better standards of living, as well as decreased levels of absolute poverty.
One disadvantage of economic growth is that caused by production and consumption can increase.
One disadvantage of economic growth is that environmental damage caused by production and consumption can increase.
True or False?
Higher economic growth always leads to a fairer distribution of income.
False.
Economic growth can lead to a lack of equity in income distribution, where the rich get richer and the poor poorer.
Investment in and improved can increase the quality of resources and lead to long-term economic growth.
Investment in technology and improved education can increase the quality of resources and lead to long-term economic growth.
Define production possibility frontier (PPF).
A production possibility frontier (PPF) is a curve showing the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently used.
Define recession.
A recession is a period of at least six months (two quarters) of economic decline in which real gross domestic product (rGDP) decreases.
What are the four main components of total demand in an economy?
The four main components of total demand are consumption (C), investment (I), government spending (G), and net exports (X–M).
True or False?
A decrease in the quality of resources is a demand-side cause of recession.
False.
A decrease in the quality of resources is a supply-side factor that can cause a recession.
How can higher interest rates contribute to a demand-side recession?
Higher interest rates make borrowing more expensive, reducing consumption and investment, which can lower total demand and trigger a recession.
Give one example of how a decrease in the quantity of resources can cause a recession.
A natural disaster can destroy productive land or capital, reducing the quantity of resources and causing a supply-side recession.
How can a reduction in the quality of resources lead to long-term economic decline?
A reduction in the quality of resources lowers productivity and efficiency, which decreases the productive capacity of the economy, leading to long-term economic decline.
Define disposable income.
Disposable income is the amount of money a consumer has left to spend or save after taxes have been paid.
True or False?
A recession can lead to both higher government spending on welfare and lower tax revenues.
True.
During a recession, governments must spend more on welfare due to higher unemployment, while receiving less tax revenue from income and sales taxes.
Define demand-side policies.
Demand-side policies are policies that aim to increase or decrease the total demand in an economy, typically through changes to fiscal policy (government spending and taxation) or monetary policy.
Any policy that increases consumption, investment, government spending or is likely to promote economic growth (cause an increase in real GDP).
Any policy that increases consumption, investment, government spending or net exports is likely to promote economic growth (cause an increase in real GDP).
Why are demand-side policies most effective when there is spare capacity in the economy?
Demand-side policies are most effective when there is spare capacity because increasing demand can lead to higher output and employment without causing significant inflation.
Define supply-side policies.
Supply-side policies are measures taken to increase the total supply in an economy by improving the efficiency and productivity of firms and workers.
What is a key advantage of supply-side policies compared to demand-side policies?
A key advantage of supply-side policies is that they can increase the productive capacity of the economy without raising inflation, resulting in long-term growth.
One disadvantage of supply-side policies is that they are often to work, with benefits sometimes only appearing years after implementation.
One disadvantage of supply-side policies is that they are often slow to work, with benefits sometimes only appearing years after implementation.
How can reducing welfare benefits be considered a supply-side policy?
Reducing welfare benefits encourages more people to make themselves available for work, increasing the supply of labour and potential output in the economy.
True or False?
Demand-side policies are an effective long-term solution to low productivity in an economy.
False.
Demand-side policies are generally not a long-term solution to low productivity, as they focus on increasing total demand rather than addressing supply-side issues such as skills shortages.
Building an additional runway at the national airport is considered a -side policy in the long term because it increases the supply of runways and boosts economic activity.
Building an additional runway at the national airport is considered a supply-side policy in the long term because it increases the supply of runways and boosts economic activity.
Define productive capacity.
Productive capacity is the maximum possible output an economy can produce when all resources are fully and efficiently utilised.