A country’s national income per head increases. What could explain why this is accompanied by a fall in households’ standard of living?

A an increase in personal taxes
B an increase in the trade deficit
C an increase in population
D a rise in the exchange rate [J09/P3/Q15]

➡Answer A

An increase in personal taxes i.e. more than the increase in income per head reduces disposable income







A government uses real personal disposable income per head as a measure of the standard of living. What does this measure not take into account?

A the distribution of income
B the level of national income
C the size of the population
D the average price level [JI2/P3/QI7]

➡Answer A

Per head income is an average measure, therefore it does not take account of distribution of income





Over a given period, the nominal value of a country’s national income increased by 20% and the rate of inflation was 10%. What can be deduced from this information?

A There was an increase in the volume of output.
B There was a reduction in the demand for money.
C There was an increase in the income velocity of circulation.
D The country’s money supply increased by 10%. [N12/P3/QI6]

➡Answer A

MV = PY, in the equation PY indicates the nominal value of NY. If PY rises by 20% and P alone increases by 10% then Y must have increased by 10%.







What might cause the growth of measured GNP to overstate the ‘true’ rate of economic growth in an economy?

A People move from unpaid housework to paid employment.
B The exchange rate is overvalued according to purchasing power parity.
C There is a reduction in environmental pollution.
D There is a reduction in the rate of investment in physical capital. [N13/P3/Q17

➡Answer A

Gross national product (GNP) is the total market value of the final goods and services produced by a nation's economy during a specific period of time (usually a year). Output, not counted previously, now becomes the part of GNP. therefore GNP increases without any real increase in output




Gross Domestic Product (GDP) per head is an indicator sometimes used to compare living standards of various countries. GDP is converted into a common currency at market exchange rates. What might cause this indicator to exaggerate the relative position of an individual country?

A a high level of female participation in the labour force
B a high level of foreign ownership in domestic industry
C a high level of subsistence farming
D relatively low hours worked by the labour force [N15/P3/Q23]

➡Answer B

Foreign ownership of the country’s resources will cause part of its GDP to be transferred abroad therefore the country’s GDP will not indicate the actual level of income available to the people of this country


What would cause estimates of the money value of the ‘Measure of Economic Welfare’ for a country to be greater than the value of ‘Gross National Product*?

A negative externalities such as pollution
B property income received from abroad
C regrettable necessities
D the value of non-marketed activities and leisure [J16/P3/Q19]

➡Answer D


Measurable Economic Welfare (MEW) is an alternative measure for living standards. It measures not only the total national output (GDP) but also includes the economic welfare of the country. This includes an assessment of the value of leisure time and the amount of unpaid work in an economy. MEW also includes the value of the environment damage caused by industrial production and consumption.








During a certain period, a country with a constant population expands its output per head. It also experiences a significant increase in river and atmospheric pollution. In the absence of any other changes, which measure would show a decrease in living standards?

A Gross Domestic Product per head
B Gross National Product per head
C Human Development Index
D Measure of Economic Welfare [J17/P3/Q21]

➡Answer D

Measurable Economic Welfare (MEW) is an alternative measure for living standards. It measures not only the total national output (GDP) but also includes the economic welfare of the country. This includes an assessment of the value of leisure time and the amount of unpaid work in an economy. MEW also includes the value of the environment damage caused by industrial production and consumption.







How might real GNP per head be adjusted to make it a more reliable indicator when comparing standards of living in different countries?

A adjustments to allow for differences in population size in different countries
B adjustments to allow for differences in rates of inflation in different countries
C adjustments to allow for differences in the relative size of the hidden economy in different countries
D the use of market exchange rates rather than purchasing power parity exchange rates [N17/P3/QI9]

➡Answer C

Generally Hidden or black economy is not accounted for in real GDP per head. If it can be adjusted it will make real GNP per head a more reliable indicator of living standard.