1.

(a) Suggest three possible reasons why a government might measure national
income. [10 marks]

Responses should include the following:

A definition of national income in terms of increases in total output in the economy,

measured by rises in GDP (gross domestic product) or gross national income (GNI). This can
be calculated by either the output, expenditure or income method.

A diagram showing that long term economic

growth can be illustrated by either a right
shift in PPF (diagram to the rıght) or an AD /
AS curve showing a right shift in the AS
curve, (diagram two below), illustrated by a
rise in economic activity from Y1 to Y2.

The response should then continue with an

explanation of some of the possible reasons
for governments measuring national income
include.

Firstly, just as a parent might request a term

report from their children’s school, measuring
national income is a good indicator of living
standards. This is because why economists
accept that national income is not a perfect measure of living standards, it does provide a
relatively accurate illustration of the living standards in a nation. This is then important
because the state of the economy is a good indicator of the governments own performance. It
is not uncommon for governments to pin their entire reputation on their own competence at
managing the economy and providing a high
living standards for its citizens.

Secondly, GDP data can also provide a good

yard stick with which to compare the
economic performance between the nations
own economy and the economies of rival
nations.

Thirdly, when a nation is part of a

multinational association such as the EU,
Nato or the UN, calculating national income
statistics is also compulsory as the
contribution that each nation pays to the
organisation is allocated on a % of their
national income. With almost all nations
part of the UN this reason alone dictates that
a government should calculate its national income data in an accurate and consistent manner.

© Mark Johnson,
InThinking www.thinkib.net/Economics 1
Very importantly also national income data can also be used as the basis for economic
forecasts as well as the basis of future decisions by businesses and governments, e.g. tax or
interest rate policy. One of the most difficult economic policy decisions that a nation faces is
the control of interest rates and tax policy. In many cases the level of interest rates or income
tax will be set by central banks and the rate of growth of national income is a key determinant
of any decision. For instance in periods of time, when there is a slowdown in economic
activity, the central bank will choose to boost their economy by a combination of cutting
taxes, raising government spending or reducing interest rates in the economy. Similarly,
when the economy is facing inflationary pressures then they are likely to do the opposite,
reducing government spending, raising taxes and / or increasing interest rates in an attempt to
reduce inflationary pressures in the economy and stabilise the currency value.

Lastly, and perhaps most cynically, many governments may also use national income data for
their own ends, to use either as a weapon to beat the opposition with or gain support from
their own supporters.

Responses should also finish with a suitable conclusion, stating that governments calculate
national income data for a number of reasons – some necessary, some sensibly and others
more cynically.

© Mark Johnson,
InThinking www.thinkib.net/Economics 2
Responses in section (a) should be graded according to the following mark bands:

Maximum mark 10

Level Descriptor Mark

0 The response is below the standards described below. 0
1 National income is not defined or is defined incorrectly. 1-3
The response demonstrates a limited understanding of the demands of
the question.
There is limited economic theory included in the response.
Only a few plausible reasons why a government might measure
national income are included.
The response contains significant errors.
2 A basic definition of national income is provided. 4-6
The response demonstrates an understanding of the demands of the
question.
There is some relevant economic theory included in the response.
Some appropriate reasons why a government might measure national
income are included.
Only a small number of examples included, or examples are included
which are poorly explained / applied.
There are some errors but these are relatively minor.
3 An accurate definition of national income is provided. 7-8
The response demonstrates a good understanding of the demands of the
question.
Relevant economic theory included in the response.
At least three relevant reasons why a government might measure
national income are included and each is correctly explained.
Examples are included that are relevant to the question.
There are minimal errors included in the response.
4 An accurate definition of national income is included. 9 - 10
The response demonstrates a clear understanding of the demands of the
question.
Relevant economic theory included in the response.
At least three relevant reasons why a government might measure
national income are included and each is correctly explained.
Examples are included that are relevant to the question and add to the
overall quality of the response.
Any errors are minor and do not detract from the overall quality of the
response.

© Mark Johnson,
InThinking www.thinkib.net/Economics 3
(b) Using real world examples, evaluate the view that demand-side policies are the most
effective method of increasing the level of national income. [15 marks]

Command term: Evaluate

The command term asks candidates to evaluate whether demand or supply-side policies are
more effective in increasing the level of national income. Candidates must consider
arguments in support of this statement followed by counter arguments, followed by a suitable
conclusion based on the evidence provided.

Real world issue - how does government manage their economy and how effective are these
policies.

Responses should also include the following:

A definition of national income and

demand-side policies. If this has already
been defined in part (a) of the response
then there is no need to repeat this
definition. However, candidates are
required to refer to this definition at the
beginning of the section, in order to gain
credit for it.

A recognition that demand side policies

can be divided into fiscal and monetary
policies, with an explanation that
expansionary demand-side policies can
increase the level of national income /
economic growth by increasing one or
more of either C, G, I or X.

A diagram representing a right shift in AD as a result of expansionary fiscal or monetary

policy. Examples might include a rise in government spending or a reduction in interest
rates, leading to a rise in AD and an increase in national income from Y1 to Y2.
Alternatively candidates may draw a PPF diagram
showing a movement towards a point closer to the
PPF maximum, shown on diagram two by a rise
from point A to B.

Examples of different monetary and fiscal

demand-side policies which can increase either
consumption, government spending, investment
or net exports.

On the other hand there are considerable

disadvantages of governments using demand-side

© Mark Johnson,
InThinking www.thinkib.net/Economics 4
policies to stimulate economic growth. Examples of problems that may arise as a result of
using demand side policies include time-lags, inflationary pressure, increased government
debt, increased imports or crowding out. It should also be noted that demand side policies are
only effective when their is spare capacity in the economy. Without available unemployed
resources any rise in aggregate demand is likely to be inflationary only.

The response also needs to include a

discussion of alternative policies that may
be used to increase economic growth -
supply side policies. This should start with
a discussion of how national income can
rise as a result of supply-side policies, with
examples of supply side policies that may
be effective e.g. improvements to
infrastructure, investments in human capital
as well as increased spending on research
and development.

This can be illustrated by an AD/AS

diagram (diagram 3), illustrating a shift in
the AS curve and a rise in national income
from Y1 to Y2 or a PPC diagram
illustrating a right shift in the PPF curve
(diagram 4).

A discussion of some of the disadvantages of

governments using supply-side policies, e.g.
time-lags, the cost of large scale investment
projects and the uncertain effectiveness of
lowering taxes.

Real life examples that could be used to

support the response could include the
significant stimulus policies employed by the
US government following the financial crisis of
2007-8. Such policies were considered to be
effective in helping the American economy
revive itself after the recession, although at a
considerable cost to the nation's finances and
some criticisms from free market economists.

An example of a real life example of government stimulus measures that can be considered
less effective in stimulating economic growth might include the Japanese stimulus packages
that have failed to rescue the economy from persistent recession and stagflation.

A conclusion with an evaluation of the above arguments in terms of short-term versus long-
term consequences and the impact on different stakeholders. This section of the essay is also

© Mark Johnson,
InThinking www.thinkib.net/Economics 5
suitable for students to provide their own opinions on the effectiveness of demand side
policies in raising economic growth. A suitable conclusion might be that demand side
policies are straightforward to implement and are relatively effective in the short term,
providing their is spare capacity in the economy. However, they do little to improve long
term growth in the economy, which is best served by the implementation of supply side
policies which have the ability to improve the quantity and / or quality of the available factors
of production.

© Mark Johnson,
InThinking www.thinkib.net/Economics 6
Responses in section (b) should be graded according to the following mark bands:

Maximum mark 15

Level Descriptor Mark

0 The response is below the minimum standards described below. 0
1 Neither national income or demand side policies are not defined or are defined 1-4
incorrectly.
The response demonstrates a limited understanding of the demands of the
question.
There is limited economic theory included in the response and any application
to the question is vague or non existent.
The response contains significant errors.
2 Either national income or keynesian policies are defined correctly. Or a basic 5-8
definition is provided for both.
The response demonstrates some understanding of the demands of the
question, with some demand side policies identified.
Relevant economic theory is included in the response and there is some
attempt to apply this to the question.
Some recognition that demand side policies are effective in creating economic
growth in the short term, but not in providing long term economic growth.
Some links are made to the real-life issue.
There are some relatively minor errors in the response.
3 National income and demand side policies are defined correctly. 9 - 12
The response demonstrates an understanding of the demands of the question,
with both specific fiscal and monetary policies identified.
Relevant economic theory is included and applied effectively.
There is a clear explanation that demand side policies are effective in creating
economic growth in the short term, but not long term economic growth.
At least one relevant diagram is included.
There is a recognition of the effectiveness of alternative (supply side) policies
in raising national income.
The real world issue is applied appropriately in the response.
There are minimal errors included in the response.
4 National income and demand side policies are defined correctly. 13 - 15
The response demonstrates a clear understanding of the specific demands of
the question, with both specific fiscal and monetary policies identified.
Relevant economic theory is included and applied effectively.
There is a clear explanation that demand side policies are effective in creating
economic growth in the short term, but not in providing long term economic
growth.
At least two relevant diagrams are included, one illustrating a rise in economic
growth resulting from a rise in AD and one from a rise in AS.
There is a recognition of the effectiveness of alternative (supply side) policies
in raising national income.
The real world issue is applied skillfully in the response.
Any errors are minor and do not reduce the quality of the response.

© Mark Johnson,
InThinking www.thinkib.net/Economics 7