Which measure is a more accurate indicator of Ireland's economic welfare: Gross Domestic Product (GDP) or Gross National Income (GNI)? Justify your answer - Leaving Cert Economics - Question 15 - 2021

A recession refers to a period of negative economic growth lasting at least two quarters. It is characterized by a decline in GDP, resulting in decreased levels of income, employment, and investment. During a recession, businesses may face reduced demand for goods and services, leading to layoffs and lower consumer spending.

Based on the graph presented, both Ireland and the United States experienced recessions from 2007 to 2009. During these years, the GNI per capita for both countries showed a decline, indicating economic contraction. This downward trend demonstrates that the economic conditions were unfavorable for both Ireland and the US during this period.

Using GNI per capita is crucial for comparing the economic welfare of different countries because it accounts for the size of their populations. Simply looking at total GNI can be misleading, as countries with larger populations may show higher GNI figures without necessarily indicating higher living standards. Per capita measures allow for a more accurate assessment of the average income available to individuals in each country, providing insights into the actual economic conditions experienced by residents.

The multiplier reflects the effect that an initial change in spending has on the overall economy. Specifically, it represents the ratio of change in national income to the initial change in spending. For instance, if government spending increases, this initial injection can lead to increased consumption and production throughout the economy, resulting in a more significant overall increase in national income than the original amount spent.

To calculate the multiplier, we first need to find the marginal propensity to save (MPS), which is given as:

$MPS = 1 - MPC = 1 - 0.65 = 0.35$

Next, we can calculate the multiplier using the formula:

$Multiplier = \frac{1}{MPS + MPM + MPT}$

Substituting the values we have:

$Multiplier = \frac{1}{0.35 + 0.25 + 0.10} = \frac{1}{0.70} = 1.43$

1. Lost Rent: When large corporations withdraw from their rental contracts, the property owners will no longer receive rental income. This reduces their overall income and spending capacity, which can lead to a decrease in consumer spending, impacting local businesses and potentially triggering layoffs.

2. Reduced Demand for Goods and Services: The departure of such corporations means that local businesses, which relied on employee spending, will likely face a loss in revenue. This reduced demand can lead to decreased employee work hours or job losses, further exacerbating the economic downturn and creating a more profound negative multiplier effect in the local economy.