Economics Test Notes

8.1 (a) Using a diagram to show the income flow of the circular flow model, identify the four factors of production and their respective payments. [10 marks]

Circular flow of income model represents a closed economy(income flow is the inner circle)
Assumption that decision makers are either the households or the firms. They are linked together through the resource market and the product market Households own four factors of production: land: rent labour: wages capital: interest entrepreneurship: profit Firms pay Household back: Income of households rent (land) wages (labour)
Interest (capital)
Profit (entrepreneurship) Cost of production: the payment firms make to buy factors of production
Revenue : payment firms receive for selling the goods
Income flow = expenditure flow
Income flow and expenditure flow has to equal the value of output flow The circular flow of income shows that in any given time period (say a year), the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.

8.2 (a) Using a circular flow diagram, explain how the size of the flows will change depending on the relative size of leakages and injections. [10 marks]
● leakages > injections: income flow becomes smaller
○ fewer goods and services are purchased
○ less output, less factors of productions needed
■ unemployment increases, income reduces
● leakages < injections: income flow becomes larger
○ produces more, more factors of productions purphased
○ unemployment falls, income increases

Leakages: savings, taxes, imports
Injections: Investment, government spending, exports
When households save income → leakage ( banks, stocks and bonds)
Firms obtain funds (borrowing, issuing stocks and bond) to production of capital good.
Taxes (leakages) and government spending on health, defence, education (injections)
Imports and exports open economy is when there is international trade through imports and exports
Imports = leakage
Exports = injections 8.3 (a) Explain the possible importance of using ‘green GDP’ as a measure of economic activity. [10 marks] GDP = C+I+G + ( X­M) consumption plus investment plus government spending plus net export
Real GDP eliminate the influence of changing prices on the value of output.
Capitals getting worn out is called depreciation. gross investment = depreciation + net investment
Total investment = worn out capital goods + additions of new capital
Net domestic product = C + In + G + X­M

Real GDP include the cleaning up of pollution making the nation seem better off
● Green GDP: GDP that accounts for the value of resource and environmental destruction. ● Green GDP = GDP − the value of environmental degradation
● measures the links between economy and the environment
○ help the policy­makers make decisions and become more aware
Green GDP also allows for more accurate accounting of negative externalities and degradation Green GDP = GDP ­ Value of environmental degradation ­ P
P equal to cleaning up pollution, avoiding further environmental damage and health care costs China has shown growth in GDP but for green GDP there is no growth
“genuine saving” ­ How much natural capital is being destroyed or saved 8.4 (a) Using a business cycle diagram, explain the phases of the business cycle and the long term growth trend. [10 marks]

Expansion: Real GDP growth, employment of resources increases, and the general price level of the economy begins to rise more rapidly. Peak: A Peak represents the cycle’s maximum real GDP, marks end of expansion. Economy experiencing inflation with price level rising rapidly and unemployment of resources fallen substantially. Contraction: economy experience falling real GDP, showned by the downward sloping parts of the curve. If lasted six months or more then it is a recession. Increases in price level slows down. Trough: represents the economy’s minimum level of GDP. Widespread unemployment.

Business cycle is irregular and unpredictable with no definite time interval
Expansions usually lasts longer than contractions
Long Term Growth Trend ­ average growth over long periods of time
Real GDP flunctuates around potential GDP. When GDP is expanding ­ low unemployment but there are still natural rate of unemployment natural rate of unemployment include people who are in between jobs, people moving, people training, people temporarily out of work.

8.5 (a) Using the circular flow model, describe the relationship between the income flow, the expenditure flow and the value of output flow. [10 marks] ● income flow: household incomes coming from the sale of all the factors of production
● expenditure flow: expenditures by households on goods and services
● income flow + expenditure flow = circular flow of income
● income flow = expenditure flow = value of output flow
● value of output flow: value of goods and services, pr the value of total output produced by the firms
● each good and service multiply by its price and add them up = the value of total output, which is the same as consumer expenditure as it is equal to each item times its price.

8.6 (a) Explain what factors can account for different values of GDP and GNI (GNP) for a single country. [10 marks] ● GDP is the total value of all final goods and services produced within a country over a time period, regardless of who owns the factors of production.
● GNI is the total income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country’s residents regardless where the factors are located.
● Gross national income = Gross national product GDP and GNI do not accurately measure the true value of output
1. GDP and GNI do not include non­marketed output
­ one repairing their own house vs hiring a worker ( added to GDP)
­ less developed countries have households that are often quite self sufficient
2. GDP and GNI do not include output from underground markets
­ Reselling at a higher price above price ceiling etc
3. GDP and GNI do not take into account quality improvements in goods and services
­ techonology improvements sell shit at lower price xD
4. GDP and GNI do not account for externalities, depletion of resources
5. GDP and GNI and differing domestic price level
­ gives a misleading picture of standards of living

8.7 (a) Using the circular flow model, explain what might happen to the level of income of an economy if it experiences an increase in exports and an increase in taxes. [10 marks] Draw diagram
National income = the aggregate output
● Increase in taxes
○ household pay taxes to the government. As it is not spent to buy goods and services, ot os a leakage to the money flow.
○ A tax (a leakage) is larger than government expending (an injection). This means that part of the household income that leaks as saving into government does not come back into the flow as government spending. The result is that fewer goods and services are purchased, firms cut back on their output, they buy fewer factors of production, unemployment increases (since firms buy a smaller quantity of labor) and household income is reduced.
● Increase in exports
○ exports are goods and services produced domestically and purchased by foreigners whereas imports are produced in other countries and purchased by domestic buyers. Together, they form an open economy and are linked through

other countries. Exports are an injection because they are the money that the foreigners spend buying goods and services produced by the domestic firms.
○ Export is greater than spending on imports; then the expenditure flow increases since the injection is larger than the leakage. Foreigners demand more goods and services, firms begin to produce more by purchasing more factors of production, unemployment falls (as firms buy a larger quantity of labour), and household income increases. (b) Examine the output approach, the income approach and the expenditure approach to measuring national income and the value of output produced by an economy. [15 marks] ● The expenditure approach adds up all spending to buy final goods and services produced within a country over a time period
○ total spending: consumption by households(C), investment by firms (I),
Government spending (G), Net exports (X­M)
○ GDP = C+I+G + ( X­M)
■ the market value of all final goods and services produced in a country over a time period
■ one of the most commonly used measures of the value of aggregate output ○ ISSUE: investment in capital by the firms only include spending on physical capital, but not human d and natural capital. Many argue that these types of investments should be included as they represent value of goods and services produced. ● The income approach adds up all income earned by the factors of production that produce all goods and services within a country over a time period
○ wages + rent + interest + profits = national income
○ ISSUE: national income only measures the factors of production, which does not include depreciation, the wearing out of capital goods, and indirect taxes.
Adding into these two factors, we obtain the measure of aggregate output called GNI and the expenditure approach DO includes them.
● The output approach calculates the value of all final goods and services produced in a country over a time period
○ In order to avoid double counting the values of intermediate goods and services, we only count the values added in each step of the production process ○ calculates the value of output by economic sector then add up to obtain the total value of output for the entire economy. This provides us a chance to study the performance of each sectors and make comparisons
○ WHAT’S THE ISSUE HERE QQQQQQQQ
● CONCLUSIONNNNNN

8.8 (a) Explain whether you agree or disagree with the following: If a government wants a measure of its population’s average income level it should use GDP per capita figures; if it wants a measure of the quantity of output produced on average per person it should use
GNI (GNP) per capita figures. [10 marks] Disagree
Define per capita
● GDP per capita is the total GDP of a country divided by its population
○ it measures the total value of all final goods and services produced within a country over a time period.
● GNI per capita
○ Total income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country’s residents regardless where the factors are located. (b) Evaluate the use of national income statistics as the basis for making comparisons over time and as the basis for comparing the standard of living across countries. [15 marks] Lots of flaws associated with examining standards of living across countries
1) GDP and GNI do not make distinctions about the composition of output
­ eg. country could be producing weapons or healthcare or education all of which contributes to the GDP but have different effects on the standards of living
2) GDP and GNI do not relect achievements in levels of education, health and life expectancy ­ countries may differ in levels of health and education. Increased life expectancy from technological improvements = higher standards of living. yet not accounted for by GDP
3) GDP and GNI do not provide information on the distribution of income
4) GDP and GNI do not take into account increased leisures
­ How much one work vs play
5) GDP and GNI do not account for quality of life
­ security, diplomacy, political freedom, religious freedom etc. Making Comparisons over time real GDP and GNI overtime is still misleading even when they take price level changes into account. Any change in percentage of GDP and GNI may over or under estimate changes in standards of living Mr. Rock’s godly advice
There is no absolute formula for either part as it depends on the question. Part A is mostly "information" ­ you demonstrate what you know and typically include diagram(s), example(s), and use as economics terminology accurately and appropriately. But part B is not only demonstrating knowledge but also

demonstrating the ability to critically think. Again, it depends on the question as there are several different command terms (which you've reviewed in the course guide, right?). But generally, you address part B questions by critically applying knowledge. So for instance, in part A one might demonstrate how to explain how to model a negative production externality but in part B one might need to explain the difficulty in identifying and approaching a NPE in the real world. This can sometimes be done using examples and diagrams but those then become secondary to part B questions. In short, part A is for you to demonstrate knowledge. Part B is for you to demonstrate a more subtle and critical approach to knowledge. ● Take a few minutes and plan your responses, taking note of what terms deserve to be defined, the concepts you'll use to enhance your explanation/analysis, what diagram(s) are appropriate, and strategies for evaluation.
● Define all key terms in the question.
● Use a diagram whenever possible (only rarely will it not be appropriate).
○ Fully label your diagram (axis, points, curves, and movements)
○ Reference and explain the key points of your diagram in your analysis.
● Use examples whenever possible and especially real­world examples when possible.
● Determine how best to evaluate/examine/etc. part B and do so fully. Some strategies are to:
○ Compare disadvantages and advantages
○ Compare theory to reality (often there are notable gaps)
○
○ Prioritise the arguments. That is, identify which arguments are stronger than others and why. ○ If the consequences are different in the short­run versus the long­run, say so and why this matters.
○ Consider all stakeholders (e.g. consumers, government, third­parties, firms, etc.). Who is affected? Who is affected adversely and who benefits? And to what degree?
○ Consider possible bias of the author in data response questions.
● Conclude your Part B essay question (and data response questions that ask for evaluation) with a clear explanation of your argument. Command terms http://moodle.kas.tw/pluginfile.php/419/mod_resource/content/1/Assess%20%20Command%20Terms.pdf