Growth and uses of national income notes

Question 1

What is Short-Run Growth?

Answer 1

-The actual annual percentage change in real national output.

Question 2

What is Long-run Growth?

Answer 2

-An increase in the potential productive capacity of the economy.

Question 3

What is Real GDP?

Answer 3

• The value of goods an services produced in the economy over a period of time that also takes inflation into account.

Question 4

What is GDP?

Answer 4

-The value of goods an services produced in the economy over a period of time.

-This is a key measure of the health of an economy.

Question 5

What is National Expenditure?

Answer 5

-Consumption + investment + government spending + net exports.

Question 6

What is the National Income?

Answer 6

-Adding up all an economy’s incomes (wages, interest, profits and rent.

Question 7

What is the National Output?

Answer 7

-The value of output from each of the main economic sectors.

Question 8

What is the relationship between National Income, National Expenditure, National Output?

Answer 8

-National Income = National Expenditure = National Output.

-One person’s expenditure is another’s income.

Question 9

What are the four main economic sectors to measure the value of Output?

Answer 9

-Primary

-Secondary

-Manufacturing

-Quarternary

Question 10

What is a nominal value?

Answer 10

• A value expressed in monetary terms.

Question 11

What is Real value?

Answer 11

-Adjusted for inflation by judging figures against a base year.

Question 12

How do you convert from nominal to real terms?

Answer 12

-Real value= index of comparison period (usually base year) divided by index of current period.

-This should then be multiplied by the nominal value.

Question 13

What is the total national income?

Answer 13

-The value of all goods and services produced in a country.

Question 14

What is the Per capita income?

Answer 14

-Total income divided by the number of people in the country. (i.e: total GDP per person).

-This is a better indicator as it is not skewed by population.

-Used to compare standards of living across countries.

Question 15

What is the volume of GDP?

Answer 15

-The quantity of goods and services produced in a country.

Question 16

What is the value of GDP?

Answer 16

-The monetary worth of the goods and services produced in a country.

Question 17

What is the GNI?

Answer 17

-The Gross National Income of a country is its total level of income - GDP plus net income from abroad. For example: interest and dividends.

Question 18

What are the three objectives required to compare countries as accurately as possible?

Answer 18

-Inflation (real GDP)

-Population (real GDP per capita)

-Costs of living/exchange rates (purchasing power parity)

Question 19

What is PPP?

Answer 19

• Purchasing Power Parity, the alternative to using market exchange rates.

-The actually purchasing power of any currency is the quantity of that currency required to buy a basket of common goods or services in that country.

Question 20

How is the PPP determined in each country?

Answer 20

• It is based on its relative cost of living and inflation rates.

-Ultimately PPP is the equation of purchasing power of two currencies by accounting for differences in inflation rates and cost of living in each country.

Question 21

How often does the World Bank construct and release a report that compares various countries in terms of PPPs and US Dollars?

Answer 21

-Every three years.

-These reports typically reveal when PPPs are used and the gap that exists between wealthy countries and poverty-stricken nations.

Question 22

What are the advantages of PPPs

Answer 22

• Unaffected from speculation, which changes the exchange value of goods in a country.

-Using an identical basket of goods to compare countries allows us to compare on a like-for-like basis.

Question 23

What are the disadvantages of PPP?

Answer 23

• The exchange rate is mostly determined by such speculative investment, these often move the real exchange rate away from the PPP value.

-It is complex to compare an identical basket of goods in different countries, which have different labour, costs, tastes.

Question 24

What are the limitations of GDP?

Answer 24

• Accuracy of statistics.
• Ignores work without a monetary value.
• Does not consider negative externalities.
• Does not show inequality in distribution.
• No account of innovation, quality, changes in working conditions.

Question 25

What is Happiness Economics?

Answer 25

- Looks at how content individuals are with their life from a theoretical and scientific viewpoint.

Question 26

What six factors affect happiness according to the UN?

Answer 26

-Real GDP per capita -Healthy life expectancy -Having someone to count on -Perceived freedom to make life choices -Freedom from corruption -Generosity

Question 27

What is Human Development Index?

Answer 27

- An average and expected years of schooling. - A long and healthy life. -Standard of living: GNP AT PPP.

Question 28

What are the Pros of Human Development Index?

Answer 28

- A composite index that captures three aspects of living standards. -Education and health valuable assets. -Highlights countries with same GNI but different levels of economic development. -UN records for all countries, so easy to access and reliable source.

Question 29

What are the cons of the Human Development Index?

Answer 29

-Regional variations within countries. -Reflects long-term rather than short-term changes. -Using GNI captures same of the same faults as using GDP. -Other factors not captured. For example: war, pollution, etc.

Question 30

What is Human Poverty Index?

Answer 30

-Composite index: Longevity, knowledge, and decent living standard. -Developing countries: probability at birth of dying before 40, adult literacy rate and percentage with access to improved water source + % of children underweight for their age. -Developed countries: probability at birth of dying before 60, percentage of adults lacking function literacy skills and percentage of population living below 50 percent of median household disposable income + social exclusion as indicated by the long-term unemployment rate. -HPI measures deprivation in basic human development

Question 31

What are the Pros of the Human Poverty Index?

Answer 31

-A composite index that captures three aspects of living standards. -Education and health valuable assets.

Question 32

What are the Cons of Human Poverty Index?

Answer 32

-No measure of wealth/incomes included. -Classification of countries into developed and developing. -Moral debates about the ethic of having different benchmarks for poverty.

Question 33

What is Green GDP?

Answer 33

-GDP is adjusted to take into account environmental degradation and resources depletion.

Question 34

What are the Pros of Green GDP?

Answer 34

-Captures whether economic growth is sustainable or at the expense of depleting resources and therefore won't be possible to continue into the future.

Question 35

What are the Cons of Green GDP?

Answer 35

-It way be unfair to expect low income countries to grow sustainable in the early stages of development. -There is not universal agreement on the correct level of environmental harm.

Question 36

What is the UN Happiness Index?

Answer 36

-The main ranking is based on answers from a representative sample from each nation which asks participants to rank their own current lives on a scale from 0 to 10 where 0 is the worst possible life and 10 is the best possible life. -The UN then tries to explain these rankings to show the estimated extent to which each of 6 factors- GDP, life expectancy, generosity, social support, freedom and corruption.

Question 37

What are the Pros of the United Nations Happiness Index?

Answer 37

-Directly captures living standard by asking people to rank their own living standard. -Attempts to explain livings standard against 6 different standards.

Question 38

What are the cons of the United Nations Happiness Index?

Answer 38

-People's ranking systems are not necessarily identical. -Normative judgement regarding which 6 factors cause living standards to change.

Question 39

What is the real household disposable income?

Answer 39

-The sum of final household consumption expenditure and savings. Wages and salaries are an example of disposable income.