A2 Level Macro CIE Economics Notes for Data Response & Essay paper with predicted essay questions
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Module
A2 Level microeconomics and macroeconomics
Institution
A2 Level Microeconomics And Macroeconomics
This digital copy includes A2 Level Macro (64 pages) fully written essays originally + all the possible predicted essay questions
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Discuss whether GDP is a reliable indicator of changes in the standard of living in an economy
GDP is the gross domestic product which measures all goods and services a country produces in a year.
Increase in GDP means increase in income and consumers will be able to enjoy more goods and services.
Comparison of living standards between countries are based on changes in real GDP produced within an economy
over a period of time.
- GDP per capita is a measure of the average income per person in a country.
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- Real GDP per capita takes inflation into account.
Standard of living is the material well-being of an average person in a given population. It is typically measured
using gross domestic product (GDP) per capita.
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GDP is an indicator of measuring living standards:
GDP reflects actual value of goods and services produced and consumed in the economy.
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1. An increase in GDP indicates economy is growing. As more output generally means more goods and services
being enjoyed by the consumers, showing an increase in living standards.
- The numbers as measured by GDP can be interpreted objectively since they are not subjective estimates.
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- A country with high GDP and consumption level can thus be understood as being a developed country with high
living standards.
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2. Economy experiencing economic growth also encourages firms to increase investment and number of
employment opportunities as firms seek to expand their business.
- More people employed means more people earning an income thus living standard increases.
- Generally, a significantly higher GDP is believed to come hand in hand with many other improvements such as
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high income, education, health and environmental protection.
3. GDP is a standard measurement method set by the United Nations, meaning it is one of the the most widely
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used measurement methods in the world and can be easily employed to compare state of economies between
countries.
- Through comparison, a country is able to determine its level of economic standing and the scope of of its
development progress
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GDP is NOT a reliable indicator
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However GDP may not be a reliable measure of living standards as it cannot take other factors that may influence into
consideration.
1. High GDP may be caused by high level of population levels
- It does not indicate high living standards unless real GDP per capita is used.
2. Any economic ‘bad’ event can also increase GDP even if quality of life has fallen
- Higher petrol consumption from being n the road longer due to traffic jams can increase national output
3. GDP fails to consider income distribution
- Uneven distribution usually means an increase in GDP may only disproportionately benefit higher income earners
and worsen the distribution gap
,The Kuznets curve represents how higher income per capita can lead to
increase in income inequality
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4. GDP ignore negative externalities
- Pollution from industrial factory production will lead to a reduction in living standards. Hence using GDP as a measure of
living might lead to overestimation.
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5. GDP ignores value of goods and services which are not traded
- Goods swapped in batter economy, housework, black economy (work not declared to the government) and non-
marketed goods (DIY)
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6. Changes in GDP does not reflect true change in quality of goods and services
- E.g. Price of DVD players have gone down over the years and might reduce national income even though quality of the
goods and number of features have improved
7. Purchasing power parity
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- There cannot be a true comparison between different countries as there is a different purchasing power of local
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currencies.
Due to problems associated with using GDP as a measure of comparing living standards, other alternative indicators
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include:
1. Human Development Index
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- Index combining the standard of living as measured by GNI per person, life expectancy at birth and adult literacy.
- Takes into account real GDP per capita and also other measures such as Health and Education standards in the
economy
- Life expectancy is linked to good diet, health services and proper housing
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- Adult literacy is an indicator of good educational standards, employment propects and general life chances which leads
to higher development
- HDI offers wide range of indicators of living standards other than income that can be added together to give a single
value between 0 and 1
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2. Measure of Economic Welfare (MEW)
- Takes into account factors which impacts quality of life such as leisure and working hours.
- These factors are added to the GDP figure while factors that reduce living standards such as crime and pollution level
are deducted.
3. Multidimensional Poverty Index (MPI)
- Measures the traditional monetary poverty and three standard dimensions including deprivations in health,
education and living standards that people face simultaneously.
- It asses poverty at an individual level.
- E.g. if an individual is deprived of a certain level of nutrition or is child under 18 years of age has died, it is considered to
be under health poverty.
, Conclusion:
- GDP is distorted by inflation and real GDP is a more accurate indicator of development
since it is adjusted for inflation
- Regardless, use of GDP to measure living standards in adequate
- Other indicators can be used with GDP and real GDP to obtain more accurate picture of living standards. This includes
HDI which takes into account output, adult literacy, life expectancy and MEW which considers output, environmental
damage and unpaid work.
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