CCEA A Level Economics AS 2 The Circular Flow of Income and Measuring National Income Exam Questions

About CCEA A Level Economics AS 2 The Circular Flow of Income and Measuring National Income

This topic opens Unit AS 2: Managing the National Economy and sets out how economists model and measure the whole economy. You need to explain the circular flow of income in an open economy with a government sector, including injections (investment, government spending, exports) and withdrawals (savings, taxation, imports). You then learn the three methods of measuring national income, the difference between GDP and GNP, real and nominal values, and total and per capita figures. Finally, you need to explain the limitations of GDP as a measure of living standards. CCEA questions often include a data calculation followed by evaluation of what GDP does not show.

What you need to know

• Circular flow Households supply factors to firms and receive income; firms sell goods and services to households. Income, output and expenditure flows are equal in value.
• Injections and withdrawals Injections: investment (I), government spending (G) and exports (X). Withdrawals (leakages): savings (S), taxation (T) and imports (M). If injections exceed withdrawals, national income rises.
• Three methods National income can be measured by the income method (wages, rent, interest, profit), the expenditure method (C + I + G + X - M) and the output method (value added by each sector).
• GDP and GNP GDP measures output produced within a country's borders. GNP adds net income from abroad, i.e. income earned by residents overseas minus income paid to foreigners.
• Real, nominal and per capita Nominal GDP is at current prices; real GDP removes the effect of inflation. GDP per capita divides by population and is better for comparing living standards.
• Limitations of GDP Ignores the hidden economy and unpaid work, distribution of income, leisure, environmental damage, the quality of goods and non-material aspects of wellbeing.

Common mistakes in AS 2 The Circular Flow of Income and Measuring National Income

• Treating nominal GDP growth as a rise in output; it may only reflect inflation.
• Listing savings as an injection; savings are a withdrawal.
• Using total GDP to compare living standards between countries of different population sizes.
• Confusing GDP and GNP; GNP includes net property income from abroad.
• Writing limitations of GDP as a list without explaining why each makes it a poor measure of welfare.

Try three AS 2 The Circular Flow of Income and Measuring National Income exam-style questions