Economics

1. 1.

   Explain why buying a newly produced domestic machine enters GDP but buying an existing company's shares does not itself enter current GDP.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. GDP measures production in a period, not all transactions. A brokerage service fee can count as current service output even though the share's purchase price does not.

   Marking points

   • The new machine is current production of a final capital good.
   • A share purchase transfers ownership of a financial asset rather than producing a new good or service.

   Examiner tip: Distinguish real investment in capital goods from financial asset trading.

2. 2.

   Fictional economy: C = 500, I = 120, G = 180, exports = 90 and imports = 110, all in million currency units. Calculate GDP by expenditure and the trade balance.

   [3 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Add spending on domestic final output and subtract imports already embedded in spending. A negative net-export term lowers GDP relative to C + I + G, without implying negative GDP.

   Marking points

   • Net exports = 90 - 110 = -20 million.
   • GDP = 500 + 120 + 180 - 20 = 780 million.
   • The trade balance is a deficit of 20 million.

   Examiner tip: Subtract imports once; do not subtract the deficit again.

3. 3.

   Fictional economy: nominal GDP rises from 900 to 990 while the GDP deflator rises from 100 to 110. Calculate real GDP in both years and real growth; explain what nominal growth alone misses.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Deflate each year's nominal value using its own index. Although money GDP rises by one tenth, the deflator does too, leaving constant-price production unchanged.

   Marking points

   • Real GDP initially = 900/(100/100) = 900.
   • Real GDP later = 990/(110/100) = 900.
   • Real growth = 0%.
   • The nominal increase reflects the price-level rise, not extra real output.

   Examiner tip: An index of 110 means divide by 1.10, not by 110 without multiplying by 100.

4. 4.

   Fictional simplified economy: marginal propensities to save, tax and import, each measured against additional national income (not disposable income), are 0.20, 0.10 and 0.10. Assume fixed prices and spare capacity. Calculate the multiplier and the final income change from an autonomous investment increase of 30 million; state one limitation.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Successive spending rounds shrink because saving, taxes and imports leak from domestic demand. Their combined share determines the simplified multiplier; the result is conditional on fixed behavioural coefficients and supply capacity.

   Marking points

   • Combined leakage propensity = 0.40.
   • Multiplier = 1/0.40 = 2.5.
   • Income change = 30 * 2.5 = 75 million.
   • Capacity limits, price changes or changing propensities can reduce the realised effect.

   Examiner tip: Include all stated leakages rather than using saving alone.

5. 5.

   Fictional case: Tavi's GDP per person rises after a mining boom, but profits largely go abroad and water quality worsens. Evaluate GDP per person as a measure of improved living standards.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The boom may improve jobs and tax receipts, but GDP alone cannot establish broadly shared welfare gains. Examine real resident incomes and environmental outcomes before concluding that living standards improved.

   Marking points

   • Indicative: higher real output per person can support greater material consumption.
   • GDP records domestic production even where income accrues to foreign owners.
   • An average conceals distribution and omits uncompensated environmental harm.
   • A justified judgement supplements GDP with resident income, distribution and water-quality indicators.

   Examiner tip: Do not assume foreign profits mean residents receive no benefit at all.

6. 6.

   Fictional case: Hela has idle factories but shortages of trained engineers. Evaluate whether an aggregate-demand stimulus alone can close its output gap without inflation.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Idle physical capital is not proof that every input is available. A measured stimulus can revive unconstrained sectors, while engineering scarcity may require complementary supply measures. The inflation risk depends on the pattern of demand.

   Marking points

   • Indicative: extra demand can employ idle resources and raise output.
   • Skill bottlenecks can raise wages or prices before all factories reach capacity.
   • Training or mobility measures address supply constraints but operate with lags.
   • A justified conclusion distinguishes aggregate spare capacity from sector-specific constraints.

   Examiner tip: Explain why a national output gap can coexist with local bottlenecks.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.