Measuring Economic Activity: five questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 1
Which source of income is not included in measuring real GDP?
Answer: A.
The correct answer is A: pension paid to retired people.
A state pension is a transfer payment: money is paid with nothing produced in return. GDP measures the value of goods and services produced, so transfers are excluded, including them would double-count, since the value is recorded again when the pensioner spends the money on actual goods and services.
Why the other options are included in GDP:
Note that a workplace pension paid out of a fund built from past contributions raises the same issue for the same reason: the productive activity was recorded when the contributions were earned, not when the pension is drawn.
A state pension is a transfer payment: money is paid with nothing produced in return. GDP measures the value of goods and services produced, so transfers are excluded, including them would double-count, since the value is recorded again when the pensioner spends the money on actual goods and services.
Why the other options are included in GDP:
- B, profits made by firms, is the return to enterprise, a factor of production. It is part of the income generated by producing output.
- C, rent paid to landlords, is the return to land, again a factor payment arising from production.
- D, wages paid to nurses, is the return to labour and represents the value of a healthcare service actually delivered.
Note that a workplace pension paid out of a fund built from past contributions raises the same issue for the same reason: the productive activity was recorded when the contributions were earned, not when the pension is drawn.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 2
The diagram shows an economy’s aggregate supply curve. What is likely to cause the curve to shift to the left?
Answer: B.
The correct answer is B: an increase in the marginal rate of income tax.
Explanation:
Explanation:
- Aggregate supply (AS) represents the total level of goods and services that an economy can produce at a given price level.
- When the aggregate supply curve shifts to the left, it means that the economy is able to produce less output at every price level.
- An increase in the marginal rate of income tax would lead to a decrease in the incentives for individuals and businesses to work and invest, resulting in a decrease in overall economic activity and productivity.
- This decrease in economic activity would lead to a leftward shift in the aggregate supply curve, indicating a lower level of output being produced at any given price level.
- A: an increase in investment due to a reduction in interest rates
- This would likely lead to an increase in economic activity and production, causing the aggregate supply curve to shift to the right rather than to the left.
- C: improvements in technology
- Technological advancements usually lead to an increase in productivity and efficiency, causing the aggregate supply curve to shift to the right as the economy can produce more output at the same price level.
- D: schemes to increase the geographical mobility of labour
- Increasing the geographical mobility of labour may lead to a more efficient allocation of resources and potentially increase productivity, which would likely cause the aggregate supply curve to shift to the right rather than to the left.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 3
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’?
Answer: D.
The Measure of Economic Welfare starts from Gross National Product and then corrects it in two directions: it ADDS the things national income leaves out because no money changed hands, such as unpaid household work, voluntary work and the value of leisure, and it SUBTRACTS the things national income counts as output even though they add nothing to well-being. Only the additions can push the figure above GNP, so the answer has to be one of them, and the value of non-marketed activities and leisure is the only addition on the list. Negative externalities such as pollution are subtracted, because the harm is a cost to welfare that GNP ignores, so they make the measure smaller. Regrettable necessities, meaning spending such as commuting costs and defence that is undertaken to make life possible rather than better, are subtracted for the same reason. Property income received from abroad is the adjustment that turns a domestic product figure into a national one, so it belongs to the definition of GNP itself rather than to any welfare correction.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 4
A government increases the rate of income tax. What is the effect, in the short run, on the aggregate demand curve or the aggregate supply curve?
Answer: A.
The correct answer is A) The aggregate demand curve shifts left.
Explanation:
When the government increases the rate of income tax, it essentially reduces the disposable income of consumers. This reduction in disposable income leads to a decrease in consumer spending, which is a component of aggregate demand. As a result, the aggregate demand curve shifts to the left.
Additionally, higher income taxes can also impact businesses. They may have less after-tax profits to reinvest in their businesses or may face higher costs due to increased taxes on their business activities. This can also lead to a decrease in investment spending, which is another component of aggregate demand.
On the other hand, changes in income tax rates do not directly impact the aggregate supply curve in the short run. The aggregate supply curve is primarily affected by factors such as production costs, technological advancements, and resource availability.
Explanation:
When the government increases the rate of income tax, it essentially reduces the disposable income of consumers. This reduction in disposable income leads to a decrease in consumer spending, which is a component of aggregate demand. As a result, the aggregate demand curve shifts to the left.
Additionally, higher income taxes can also impact businesses. They may have less after-tax profits to reinvest in their businesses or may face higher costs due to increased taxes on their business activities. This can also lead to a decrease in investment spending, which is another component of aggregate demand.
On the other hand, changes in income tax rates do not directly impact the aggregate supply curve in the short run. The aggregate supply curve is primarily affected by factors such as production costs, technological advancements, and resource availability.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 5
When making comparisons of living standards between different countries, what is not a reason why they may be misleading?
Answer: B.
The question asks what does NOT make a comparison misleading, so three of these have to be reasons the numbers cannot be trusted and one has to be something else. Different amounts of unrecorded economic activity distort the comparison directly, because subsistence farming and unpaid household work are real output that one country's figures capture less well than another's. Limited resources for compiling accurate estimates in less developed countries does the same thing from the statistical side, since the figure is only as good as the survey behind it. Different rates of inflation undermine any comparison expressed in money, which is why real figures and purchasing power parity conversions are used. Different rates of economic growth are not a measurement problem at all: a growth rate describes how fast a country's living standards are changing over time, which is a separate question from whether this year's comparison between two countries is accurate. Two countries whose figures were measured perfectly could still be growing at different speeds.
What this practice covers
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on measuring economic activity, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Treating nominal GDP growth as economic growth.
- Confusing GDP (territory) with GNI (residents), or getting the adjustment backwards.
- Including intermediate goods, double-counting output.
- Comparing countries at market exchange rates rather than PPP.
- Assuming higher GDP per capita means higher living standards for everyone.
- Forgetting population when interpreting a growth figure.
- Listing GDP's limitations without saying what would be a better measure.
- Describing HDI as covering the environment or inequality, it covers income, health and education.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Measuring Economic Activity revision notes.