Measuring economic activity and illustrating its variations: notes and practice questions
- This topic covers how economic activity is measured and its variations illustrated, focusing on national income accounting and well-being indicators.
- The circular flow of income model shows interactions between households, firms, government, banks, and foreign sectors, including leakages and injections.
- Gross Domestic Product (GDP) measures national output, while Gross National Income (GNI) measures national income.
- Real GDP and real GNI adjust for inflation using a price deflator.
- Real GDP per capita and real GNI per capita account for population size.
- The business cycle illustrates short-term fluctuations and long-term growth trends.
- GDP can be calculated using the expenditure approach: .
How it is examined
Calculation-heavy, and the calculations are common to both levels, which makes 3.1 prime Paper 2 part (b) material. May 2025 Paper 2 TZ3 asked for real GDP and nominal GDP per capita from a table. The AO3 row on whether GDP measures well-being is a recurring 15-mark question: SL Paper 1 TZ1 May 2025 Q2(b) asked candidates to discuss the usefulness of real GDP per capita as an indicator of economic well-being.
- GDP by expenditure = C + I + G + (X − M)
- GNI = GDP + net property income from abroad
- Real value = nominal value / price deflator × 100
- Per capita = total / population
- National income accounting as a measure of economic activity. (AO2, AO4)
- The equivalence of the income, output and expenditure approaches to national income accounting, with reference to the circular flow model. (AO2, AO4)
- Nominal gross domestic product as a measure of national output. (AO2, AO4)
- Nominal gross national income as a measure of national output. (AO2, AO4)
Guiding questions
- Why does economic activity vary over time and why does this matter?
Linking questions
- The circular flow comes from 1.1.
- C, I, G and X − M become the components of AD in 3.2.
- The deflator calculation is the same arithmetic as the CPI work in 3.3.
- GNI per capita at PPP is a single development indicator in 4.8, and the Happy Planet Index appears in both 3.1 and 4.8.
Practice questions
1 question · 1 hardQuestion 1
HardPaper 1 · no calculator25 marks(a) Explain how inward foreign direct investment (FDI) can contribute to economic growth.
(b) Using real-world examples, discuss the view that a lack of infrastructure is the most significant barrier to economic development.
Start by defining both foreign direct investment (FDI) and economic growth. Then, consider how FDI affects the components of aggregate demand and the determinants of long-run aggregate supply. Think about injections into the circular flow of income and factors that increase a country's productive capacity. A diagram would be helpful here.
To 'discuss' this view, you need to present a balanced argument. First, explain the ways in which poor infrastructure (e.g., transport, energy, sanitation) can hinder economic development. Then, challenge the view by considering other significant barriers (e.g., corruption, low levels of human capital, political instability) and argue why they might be equally or more important in some contexts. Use specific country examples to support both sides of your argument.
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Where marks are lost
- No real-world example, or a stated one. An answer that names a country and stops cannot reach the top two bands.
- One-sided argument. Balance is an explicit axis. A student who argues only that a policy works is capped at 9 out of 15 on that axis alone.
- Diagram present but not explained. The diagram bullet escalates across three bands: included, included and explained, included and fully explained. A diagram dropped into an answer without prose that refers to it sits at 5 to 6 on a 10-mark part.
