Topic 1: Introduction & Goods Markets

Question 1

GDP Measurement Methods

Answer 1

Product method, Income method, Expenditure method

Question 2

Product method

Answer 2

Sum of all values added by industries

Question 3

Income Method

Answer 3

Sum of all incomes paid to households (wages, profits, salaries, rent and interest)

Question 4

Expenditure method

Answer 4

Y = C + I + G + X - IM

C = consumption
I = investment
G = government spending
X = exports
IM = imports

Question 5

Critiques of GDP

Answer 5

• Ignores non-market activities, inequality, sustainability
• Doesn’t measure well-being, happiness or environmental impact

Question 6

Alternate measures (to GDP)

Answer 6

• HDI (Human Development Index): Includes life expectancy, education and GNI per capita
• OECD Better life index: Personalised measure of well-being across several dimensions
• Ecological footprint: assess environmental sustainability

Question 7

Circular Flow Model

Answer 7

Question 8

Endogenous Variables

Answer 8

Depend on other variables in the model

Question 9

Exogenous Variables

Answer 9

Not explained within the model but instead taken as a given

Question 10

Consumption function

Answer 10

C = Co + C1(Y - T)

Co = autonomous income
C1 = marginal propensity to consume (MPC), 0<C1<1
MPC: fraction of extra income spent

Question 11

Consumption function graph

Question 12

Keynesian Cross Model
- Equilibrium Output (Y)

Answer 12

Demand equals production: Y = Z → Co + C1(Y- T) + I + G
[ C ]
We assume taxation, investment & government spending is autonomous

Rearrange to: Y = 1/(1-C1) (Co - C1T + I + G)
Output is a multiple of autonomous spending

Question 13

Keynesian Cross Model
- The Multiplier

Answer 13

The Multiplier = 1/(1-C1)
Measures how initial changes to spending lead to further income increases
A higher MPC (C1) → larger multiplier