National income and macroeconomic objectives

ZIMSEC A Level · Economics · Form 6

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Measuring national income

GDP can be measured by output, income or expenditure. Real GDP adjusts for inflation; GDP per capita divides by population. GNI adds net income from abroad. Limitations: informal sector, inequality, quality of life, and environmental damage are not reflected.

Macroeconomic objectives

Economic growth, low and stable inflation, low unemployment, a stable balance of payments, and fair income distribution.

Aggregate demand and supply

AD = C + I + G + (X − M).
Short-run AS slopes upwards; long-run AS reflects productive capacity.
An increase in AD raises output and the price level; supply-side improvements shift LRAS right.

The circular flow and the multiplier

Injections (investment, government spending, exports) and withdrawals (savings, taxes, imports). The multiplier k = 1 ÷ (1 − MPC) = 1 ÷ MPW.

Worked example: The marginal propensity to consume is 0.75. Government spending increases by US$200 million. Find the final change in national income.

k = 1 ÷ (1 − 0.75) = 4 → ΔY = 4 × 200 = US$800 million

Economic growth

Short-run growth (using spare capacity) versus long-run growth (more capacity). Benefits: higher living standards and tax revenue. Costs: environmental damage, inequality and inflation.

Exam tip: In an open economy with taxes and imports, use the marginal propensity to withdraw (MPS + MPT + MPM) in the multiplier.

Check yourself

Write the components of aggregate demand.
MPS = 0.1, MPT = 0.2 and MPM = 0.2. Find the multiplier.
Give one limitation of GDP as a measure of living standards.

Show answers

C + I + G + (X − M).
1 ÷ 0.5 = 2
Any one: ignores informal sector, inequality, leisure, environment, quality of goods.

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