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(a) (i) State and explain the uses of national income statistics - Leaving Cert Economics - Question 7 - 2019
Question 7
(a) (i) State and explain the uses of national income statistics. (ii) Outline the limitations of using GDP as a measure of economic activity.
Worked Solution & Example Answer:(a) (i) State and explain the uses of national income statistics - Leaving Cert Economics - Question 7 - 2019
Step 1
State and explain the uses of national income statistics.
Answer
National income statistics are essential for various reasons:
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Indication of Standard of Living: Changes in national income figures provide insights into the level of economic growth or decline, offering a general indication of alterations in the standard of living over time.
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Comparison of Standards: These statistics facilitate comparisons of living standards across different countries, helping assess relative economic performance.
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Government Policy Formulation: National income data aids governments in developing their economic strategies. For instance, it informs decisions on where to allocate resources effectively to stimulate growth or direct aid to sectors in need.
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Economic Evaluation: Economists use national income figures to evaluate the impact of changes in economic activities across various sectors, establishing benchmarks for measuring progress.
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EU Budget Contributions: National income statistics play a crucial role in determining the contributions of countries to the EU budget, influencing financial aid allocations.
Step 2
Outline the limitations of using GDP as a measure of economic activity.
Answer
While GDP is a widely recognized measure of economic activity, it has several limitations:
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Population Dynamics: If the population grows faster than national income, the average standard of living may decline, making GDP an insufficient measure of economic wellbeing.
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Inflation Effects: Inflation can distort national income figures, leading to a misleading impression of growth. Changes in real income should be compared to adjust for inflation's impact on living standards.
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Unemployment Considerations: GDP growth does not account for unemployment levels; increases in national income could occur alongside rising unemployment, which may obscure economic health.
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Tax Levels: Different income tax rates can alter perceptions of living standards. A higher income tax combined with rising income might not translate to improved standards of living for individuals.
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Exclusions in Calculation: Activities contributing to economic welfare, such as household labor and volunteer work, are excluded from GDP calculations, missing vital aspects of economic health.
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Environmental Costs: GDP can increase due to activities that negatively impact the environment, thus overlooking sustainability concerns.
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Government Services Reporting: Funding for public services can distort GDP figures; for example, increased military spending might elevate GDP without reflecting improvements in societal welfare.