International A Level (IAL)
Edexcel
Economics
Unit 2
Macroeconomic performance and policy
, TOPIC 1 – MEASURES OF NATIONAL
INCOME
Measures of national income
● Gross Domestic Product (GDP): It is the final market value of the total output of goods and
services produced within an economy over a period of time.
● Gross National Income (GNI): It is the final market value of the total output of goods and
services produced within an economy over a period of time plus net incomes received from
overseas. GNI looks at the total income generated by that country’s citizens.
Nominal and real GDP
● Nominal GDP (GDP at current market prices): Nominal GDP is the money value of the total
output of goods and services produced within an economy over a period of time. It is
unadjusted for the effects of inflation and therefore shows a much higher value.
● Real GDP/ GDP at constant prices/ GDP at base year prices: Real GDP is the final market
value of the total output of goods and services produced within an economy over a period of
time after the effects of inflation have been removed.
Example:
Year Nominal GDP (£m) Price index
2013 500 100
2014 750 125
Price index∈base year
Real GDP=Nominal GDP×
Price index∈current year
100
Real GDP∈2014=750 × =£ 600 m
125
Purchasing power parity
● It is an exchange rate of one currency for another which compares how much a typical basket
of goods in one country costs compared to that of another country.
, ● If a particular “basket” of goods can be bought for £10 in the UK and $20 in the USA then,
according to PPP theory, the exchange rate will be £1 = $2.
Limitations of using GDP/GNI to compare living standards OVER
TIME
● Distribution of income: GDP ignores the distribution of income. Despite an increase in GDP
over time, a country may have lower living standards if there is income inequality with few
extremely rich people and many poor people with incomes significantly below the GDP per
capita.
● Non-material aspects of living standards: GDP does not include factors relating to quality of
life such as pollution, congestion, leisure, crime, life expectancy, literacy rates and quality of
goods and services.
● Inaccuracies in the data: Data may be inaccurate or incomplete due to the presence of
hidden economy or subsistence farming. This can underestimate the true value of GDP as
some incomes go unrecorded.
● Composition of GDP: If the composition of GDP includes government expenditure on
defence rather than education and healthcare then country’s living standards may not improve
over time.
Limitations of using GDP/GNI to compare living standards
BETWEEN COUNTRIES
● The hidden or informal economy: The size of the hidden economy differs between countries.
Greece has a much larger hidden economy than the UK. The presence of the hidden economy
will underestimate the true GDP value as these economic activities are unrecorded.
● Externalities: GDP does not take external cost into account. A country may have a higher
GDP due to massive industrialisation but this will increase the pollution levels and lower living
standards compared to those with less external cost.
● Income distribution: Income distributions differ between economies and are not taken into
account by GDP. Despite high growth rates, the distribution of income is wide between the rich
and poor in Brazil. This results into poor living standards for the lower income groups.
● Currency value: To compare living standards between countries, it is important to calculate
GDP using purchasing power parities which compares the cost of living in each country. For
, example, incomes may be quite low in Namibia say, $1000 per capita. However, due to low
living costs you can buy a lot more in Namibia with $1000 than the US.
● Inaccuracies in the data: International comparisons can also be difficult due to differences in
accounting procedures and the inaccuracy of GDP statistics collected in different countries.
Data may also be inaccurate or incomplete due to the presence of hidden economy or
subsistence farming.
Evaluation for both over time and between countries
● Real GDP may be used as an indication of the income and wealth of the economy and may be
used to compare economic growth rates between countries.
● Human Development index (HDI) may be a better measure for living standards as it combines
GNI per capita, education index and life expectancy.
● There are other measures of living standard which can also be used such as access to clean
water, mobile phones per thousand of the population
The Gross National Happiness (GNH) index
● The Gross National Happiness (GNH) index gives a holistic reflection of the general wellbeing
of the Bhutanese population.
TOPIC 2 – AGGREGATE DEMAND (AD)
Aggregate demand
● Aggregate demand is the total spending on goods and services in an economy over a period of
time.
Aggregate demand = Consumption + Investment + Government spending + (Export – Import)
AD = C + I + G + (X – M)
Edexcel
Economics
Unit 2
Macroeconomic performance and policy
, TOPIC 1 – MEASURES OF NATIONAL
INCOME
Measures of national income
● Gross Domestic Product (GDP): It is the final market value of the total output of goods and
services produced within an economy over a period of time.
● Gross National Income (GNI): It is the final market value of the total output of goods and
services produced within an economy over a period of time plus net incomes received from
overseas. GNI looks at the total income generated by that country’s citizens.
Nominal and real GDP
● Nominal GDP (GDP at current market prices): Nominal GDP is the money value of the total
output of goods and services produced within an economy over a period of time. It is
unadjusted for the effects of inflation and therefore shows a much higher value.
● Real GDP/ GDP at constant prices/ GDP at base year prices: Real GDP is the final market
value of the total output of goods and services produced within an economy over a period of
time after the effects of inflation have been removed.
Example:
Year Nominal GDP (£m) Price index
2013 500 100
2014 750 125
Price index∈base year
Real GDP=Nominal GDP×
Price index∈current year
100
Real GDP∈2014=750 × =£ 600 m
125
Purchasing power parity
● It is an exchange rate of one currency for another which compares how much a typical basket
of goods in one country costs compared to that of another country.
, ● If a particular “basket” of goods can be bought for £10 in the UK and $20 in the USA then,
according to PPP theory, the exchange rate will be £1 = $2.
Limitations of using GDP/GNI to compare living standards OVER
TIME
● Distribution of income: GDP ignores the distribution of income. Despite an increase in GDP
over time, a country may have lower living standards if there is income inequality with few
extremely rich people and many poor people with incomes significantly below the GDP per
capita.
● Non-material aspects of living standards: GDP does not include factors relating to quality of
life such as pollution, congestion, leisure, crime, life expectancy, literacy rates and quality of
goods and services.
● Inaccuracies in the data: Data may be inaccurate or incomplete due to the presence of
hidden economy or subsistence farming. This can underestimate the true value of GDP as
some incomes go unrecorded.
● Composition of GDP: If the composition of GDP includes government expenditure on
defence rather than education and healthcare then country’s living standards may not improve
over time.
Limitations of using GDP/GNI to compare living standards
BETWEEN COUNTRIES
● The hidden or informal economy: The size of the hidden economy differs between countries.
Greece has a much larger hidden economy than the UK. The presence of the hidden economy
will underestimate the true GDP value as these economic activities are unrecorded.
● Externalities: GDP does not take external cost into account. A country may have a higher
GDP due to massive industrialisation but this will increase the pollution levels and lower living
standards compared to those with less external cost.
● Income distribution: Income distributions differ between economies and are not taken into
account by GDP. Despite high growth rates, the distribution of income is wide between the rich
and poor in Brazil. This results into poor living standards for the lower income groups.
● Currency value: To compare living standards between countries, it is important to calculate
GDP using purchasing power parities which compares the cost of living in each country. For
, example, incomes may be quite low in Namibia say, $1000 per capita. However, due to low
living costs you can buy a lot more in Namibia with $1000 than the US.
● Inaccuracies in the data: International comparisons can also be difficult due to differences in
accounting procedures and the inaccuracy of GDP statistics collected in different countries.
Data may also be inaccurate or incomplete due to the presence of hidden economy or
subsistence farming.
Evaluation for both over time and between countries
● Real GDP may be used as an indication of the income and wealth of the economy and may be
used to compare economic growth rates between countries.
● Human Development index (HDI) may be a better measure for living standards as it combines
GNI per capita, education index and life expectancy.
● There are other measures of living standard which can also be used such as access to clean
water, mobile phones per thousand of the population
The Gross National Happiness (GNH) index
● The Gross National Happiness (GNH) index gives a holistic reflection of the general wellbeing
of the Bhutanese population.
TOPIC 2 – AGGREGATE DEMAND (AD)
Aggregate demand
● Aggregate demand is the total spending on goods and services in an economy over a period of
time.
Aggregate demand = Consumption + Investment + Government spending + (Export – Import)
AD = C + I + G + (X – M)
