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National Income and Inflation
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National Income and Inflation
National Income and Inflation
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1
Question
What is Gross Value Added (GVA) at basic prices and how is it related to GDP?
Answer
GVA at basic prices is calculated as GDP minus indirect taxes plus subsidies. This adjustment is called the basic price adjustment.
2
Question
Define Gross National Product (GNP).
Answer
GNP is the market value of all goods and services produced over a certain period through the labor or property supplied by a country’s citizens, both domestically and abroad.
3
Question
How is Gross National Income (GNI) calculated?
Answer
GNI is the value of goods and services produced by a country (GDP) plus net overseas interest payments and dividends.
4
Question
What is Net National Income and how is it derived?
Answer
Net National Income is GNI minus depreciation (the reduction in value of assets over time).
5
Question
What distinguishes nominal GDP from real GDP?
Answer
Nominal GDP measures economic data using current prices without adjusting for inflation, while real GDP adjusts for inflation, reflecting the true value of goods and services over time.
6
Question
Why is GDP per capita used when comparing standards of living?
Answer
Because dividing GDP by the population accounts for differences in population size, providing a more accurate measure of average economic output per person.
7
Question
Why do national income statistics exclude transfer payments?
Answer
Transfer payments are incomes without corresponding output, such as welfare or allowances, so they are excluded to avoid overstating economic activity.
8
Question
List some reasons why national income statistics may be inaccurate.
Answer
1) Statistical inaccuracies during data collection; 2) hidden economy activities like tax evasion; 3) unrecorded home-produced services; 4) difficulties in valuing public sector output.
9
Question
What are some limitations of using GDP or GNI to compare living standards over time?
Answer
Limitations include inflation effects on prices, inaccurate statistics, population changes (requiring per capita adjustment), omission of quality of goods/services, impacts of defense spending, ignoring future investment effects, excluding externalities, and ignoring income distribution.
10
Question
Why is Purchasing Power Parity (PPP) important when comparing national income between countries?
Answer
PPP adjusts exchange rates to reflect actual cost of living differences, allowing more accurate comparisons of standards of living across countries.
11
Question
What factors limit the use of GDP/GNI for international comparisons?
Answer
Different accounting methods, data quality variations, differing sizes of unrecorded economies, population adjustments needed, varying quality of goods/services, different defense spending proportions, ignoring externalities, income distribution differences, and distortion by market exchange rates and geography.
12
Question
What alternative indicators can complement GDP per capita to assess national happiness and well-being?
Answer
Job satisfaction, quality of environment, leisure time, and security are important but subjective and difficult to measure compared to GDP per capita.
13
Question
Describe the Easterlin Paradox related to income and happiness.
Answer
Income and happiness are positively related at low income levels, but higher income beyond a certain point does not correspond to increased happiness.
14
Question
Define inflation and distinguish related terms: deflation, disinflation, hyperinflation, reflation, and stagflation.
Answer
Inflation is a sustained increase in general price levels; deflation is continuous price falls; disinflation is a fall in the rate of inflation; hyperinflation is very high inflation; reflation is GDP rising after a recession; stagflation is high inflation combined with recession.
15
Question
Explain demand-pull inflation and provide the formula for aggregate demand (AD).
Answer
Demand-pull inflation occurs when aggregate demand increases, pushing up general price levels. AD = C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, and M is imports.
16
Question
What causes cost-push inflation?
Answer
Cost-push inflation happens when production costs rise—such as wages, rent, raw materials, taxes, dividends, or interest—leading firms to increase prices.
17
Question
How is inflation measured using the Consumer Price Index (CPI)?
Answer
The CPI measures changes in the weighted average price of a basket of about 600 goods and services consumed by households, reflecting how much more money is needed to buy the same basket over time (excluding housing costs).
18
Question
What are the limitations of the Consumer Price Index (CPI)?
Answer
It only represents a typical household’s spending, differs among households, does not account for quality changes, and excludes housing-related expenses, so may not fully reflect cost-of-living changes.
19
Question
What is the Producer Price Index (PPI) and how is it useful?
Answer
PPI measures changes in prices for a basket of goods bought and sold by manufacturers—including input (material/fuel) prices and output (factory gate) prices. It helps predict future inflation trends because cost increases may pass to consumer prices with a time lag.
20
Question
How does the International Labour Organization (ILO) define unemployment?
Answer
Unemployed individuals are those actively seeking work for at least four weeks, willing to start in the next two weeks, but unable to find a job.
21
Question
Differentiate between employed, unemployed, economically active, inactive, and underemployed people.
Answer
Employed have jobs; unemployed are actively seeking work; economically active includes employed + unemployed; inactive are not in the labor force (e.g., students, stay-at-home parents); underemployed want more hours or better-skilled jobs.
22
Question
How are the following rates calculated: employment rate, unemployment rate, activity rate, and inactivity rate?
Answer
Employment rate = employed / working-age population; Unemployment rate = unemployed / labor force; Activity rate = economically active / working-age population; Inactivity rate = economically inactive / working-age population.