Lesson 4.2.1.4

4.2.1.4 Uses of national income data Quiz: AQA Economics, Unit 2

20 questions

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Lesson 4.2.1.4, Uses of national income data: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Which is a limitation of using national income data to compare living standards over time?

    • It counts only the incomes of the richest households, so it gives no information about the rest of the population.
    • It excludes unpaid work such as childcare and household tasks, so it may understate changes in welfare.
    • It is measured only in nominal terms, so it can never be adjusted for any change in the price level over time.
    • It includes the value of all unpaid domestic work, so it always overstates living standards in every period of time.

  2. What is purchasing power parity (PPP)?

    • The price of a single imported good expressed in pounds, which is used to measure the cost of living in each country.
    • The fixed rate of exchange set by the government for all trade between the country and its main trading partners.
    • An exchange rate adjusted so that an identical basket of goods costs the same across countries when measured in a common currency.
    • The rate at which a central bank buys foreign currency to keep the domestic currency stable against the dollar in the case described.

  3. Why is PPP preferred to market exchange rates when comparing living standards internationally?

    • Market exchange rates always equal PPP rates, so the two methods give identical comparisons for every country in every year.
    • PPP ignores price levels, so it gives a more accurate comparison of the cost of goods in each country than market rates do.
    • PPP is calculated only from the exports of each country, so it measures competitiveness rather than living standards for residents.
    • Market exchange rates can be distorted by financial flows and do not reflect differences in domestic price levels, whereas PPP does.

  4. A country's GDP is 50 billion local currency units, and the PPP rate is 10 local units per dollar. What is GDP in dollars at PPP?

    • 5 billion dollars, since 50 billion divided by 10 units per dollar gives 5 billion.
    • 500 billion dollars, since 50 billion multiplied by 10 gives the GDP in dollars at PPP in the year concerned.
    • 0.2 billion dollars, since 10 divided by 50 gives the dollar value of GDP at PPP in the period under study.
    • 50 billion dollars, since the PPP rate does not change the value of GDP when converted to any currency at all.

  5. Nominal GDP per capita rises by 6 per cent and prices rise by 4 per cent. Approximately what is real GDP per capita growth?

    • Approximately 24 per cent, since real growth equals nominal growth multiplied by the inflation rate in every period of time.
    • Approximately 10 per cent, since real growth is always the sum of nominal growth and the inflation rate in the economy.
    • Approximately 0 per cent, since nominal growth and inflation always cancel out exactly in every period of time observed.
    • Approximately 2 per cent, since real growth is roughly nominal growth minus the inflation rate.

  6. Why might GDP per capita comparisons between countries mislead?

    • GDP per capita is always calculated in the same currency, so exchange rate effects never affect the comparison at all.
    • GDP per capita counts only public spending, so it cannot reveal the living standards of private households in any country.
    • Differences in the size of the informal economy, quality of goods and income distribution are not fully captured by GDP per capita.
    • GDP per capita always measures the distribution of income perfectly, so comparisons are fully reliable across all countries.

  7. Which is an environmental limitation of GDP as a measure of welfare?

    • It excludes all goods traded internationally, so it cannot be affected by the environmental costs of production at all.
    • It records every natural resource at its market price, so the depletion of resources always raises GDP in the period.
    • It does not deduct the depletion of natural resources or the costs of pollution, so growth can overstate the gain in welfare.
    • It deducts the value of all pollution from output automatically, so GDP is always an accurate measure of environmental quality.

  8. Why might quality improvements make national income figures understate living standards?

    • Quality improvements are always counted as a fall in output, so real national income falls whenever goods become better made.
    • Quality gains, such as faster computers at the same price, may not be fully captured in price indices, so real output is underestimated.
    • Quality improvements increase the population, which reduces real GDP per capita in every year of the period under study.
    • Quality improvements reduce prices automatically, so national income statistics are unaffected by any change in quality of goods.

  9. Real GDP rises by 3 per cent while population rises by 4 per cent. What happens to real GDP per capita?

    • It is unchanged, because a rise in population always offsets the growth in output exactly in every period of time.
    • It rises by 7 per cent, since the growth in output and population are added together to give the change per person.
    • It rises by 3 per cent, because population growth has no effect on output per person in any economy at any time.
    • It falls by roughly 1 per cent, since output per person is output divided by population.

  10. Which evaluation best challenges the use of national income data to compare living standards between countries?

    • Living standards depend only on the exchange rate, so national income data have no relevance to welfare at any level in the economy.
    • Differences in economic structure, cultural preferences and distribution mean that similar incomes may give different living standards.
    • Comparisons are always invalid, because national income data can never be used for any purpose by economists in any analysis.
    • National income data always give a complete measure of living standards in every country, because all activity is captured by GDP.

  11. Which is most likely to make GDP per capita an unreliable guide to living standards in a country with a large informal economy?

    • Informal activity is always fully recorded in official statistics, so measured GDP is complete for every country in the world.
    • Much economic activity goes unrecorded, so measured output and income understate the true resources available to households.
    • Informal activity is taxed at a high rate, so it is always included in GDP at its full value in the economy in every period.
    • Informal activity reduces the population, so GDP per capita is overstated by the official figures in the country concerned.

  12. A country's real GDP per capita grows by 2 per cent a year for ten years. Approximately what is the total growth over the decade?

    • 2 per cent, since the annual growth rate applies only to the first year and not to the later years of the period.
    • About 22 per cent, since 1.02 raised to the power of 10 is approximately 1.22.
    • 20 per cent, since 2 per cent multiplied by 10 years gives the total growth over the period in the economy concerned.
    • About 12 per cent, since compound growth is found by adding 2 per cent to the growth rate in each of the ten years.

  13. Which is a reason why GDP per capita may fail to show how living standards are distributed?

    • It is an average, so it can rise even when most households have lower incomes because the gains go to a few.
    • It is a median, so it always reflects the income of the typical household in the economy in every period of time.
    • It is calculated for households rather than for the whole population, so it reveals each household's income exactly.
    • It counts only wages, so it cannot include the incomes of the richest households in any period of time at all.

  14. Country X has GDP per capita of $20,000 at market exchange rates and $30,000 at PPP. What does this suggest?

    • Prices in X are lower than in the reference country, so the living standards of residents may be higher than market rates suggest.
    • Prices in X are higher than in the reference country, so its living standards are lower than market rates suggest in every case.
    • X's exchange rate is overvalued by exactly 50 per cent, which means the PPP figure is always the correct one for comparison.
    • X's economy is 50 per cent smaller than the market rate suggests, so its GDP is lower in real terms at all times in the case described.

  15. A government says GDP per capita grew, but inequality rose sharply. What is the most accurate evaluation?

    • Average growth always means that every household's living standards improved, so inequality is irrelevant to welfare in all cases.
    • Average growth may conceal worse outcomes for lower-income groups, so GDP per capita alone cannot show living standards for all households.
    • GDP per capita is a measure of inequality, so a rise in it always shows that the distribution of income has become more equal.
    • Rising inequality always raises GDP per capita by an equal amount for each household in the economy in every period.

  16. Real GDP per capita in country B is 25 per cent higher than in country A, and B's population is twice A's. Which statement about total output is correct?

    • B's total output is equal to A's, since the two countries have the same real GDP per capita in the year concerned.
    • B's total output is 1.25 times A's, since output per person alone determines the total output of each economy in the year.
    • B's total output is 2.5 times A's, since its output per person is 25 per cent higher and its population is twice as large.
    • B's total output is half of A's, since a larger population always reduces total output per person in the economy.

  17. Which is a limitation of comparing national incomes between countries using market exchange rates?

    • Exchange rates always equal the price level ratio between countries, so market comparisons never need any adjustment at all.
    • Exchange rates reflect only the value of exports, so they cannot affect the measured national income of any economy.
    • Exchange rates never change in the short run, so market rate comparisons are always stable over any period of time in the case described.
    • Exchange rates can fluctuate sharply due to financial flows, so measured income can change without any change in living standards.

  18. Real GDP per capita rises but life expectancy falls. What does this suggest about using income data alone?

    • Life expectancy is part of GDP, so a fall in life expectancy must always reduce measured GDP per capita in the same period.
    • Rising GDP per capita always raises life expectancy automatically, so a fall in life expectancy is impossible in such circumstances.
    • Income data may miss health, environmental and social aspects of welfare, so they are an incomplete guide to living standards.
    • Income data fully capture all aspects of welfare, so life expectancy adds no information about living standards in any country.

  19. Which statement about GDP per capita as an indicator is most accurate?

    • It is a perfect indicator of living standards, since it captures every good and service consumed by every household in the economy.
    • It is a useful but imperfect indicator, since it averages output across people and omits non-market and distributional features.
    • It measures only the number of people employed per head, so it does not reflect output or income in the economy at all.
    • It is useless as an indicator, since it measures only the spending of the government on public services in the economy.

  20. Which measure would be most suitable for comparing the size of two economies at the same point in time?

    • PPP-adjusted GDP, which values each economy's output using a common set of price relationships.
    • Nominal GDP at market exchange rates, which reflects the current price of output in each economy at prevailing rates.
    • The number of registered companies in each economy, which shows the scale of business activity in the country.
    • The balance of trade in goods, which shows the net export position of each economy over the course of the year.

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