National Income MCQ 3

GDP (Gross Domestic Product)

• Measures the value of goods and services produced by both Irish and foreign-owned Firms of Production (FOPs) within the domestic economy.
• Only accounts for economic activity within the country's borders.

GNP (Gross National Product)

• Measures the value of goods and services produced by Irish-owned FOPs in both the domestic economy and abroad.
• Includes economic activity generated by Irish-owned firms, regardless of location.
• Calculated by adding Net Factor Income from the Rest of World to GDP.

The Multiplier

• The multiplier illustrates the precise relationship between an initial injection into the circular flow of income and the resulting total increase in national income.

The Business Cycle

Phase 1: Expansion

• High levels of economic growth occur during this phase.
• Low interest rates stimulate investment and consumption expenditure.
• Optimistic consumers and investors contribute to the growth.

Phase 2: Peak

• The economy overheats, leading to high inflation.
• Firms struggle to increase supply or recruit workers due to full employment.
• A rise in interest rates and/or a fall in the marginal efficiency of capital can trigger a turning point.

Phase 3: Contraction/Recession

• A recession is defined as a fall in GDP over two successive quarters.
• National income falls due to decreased investment and spending.
• Credit availability falls, causing interest rates to rise.
• Pessimistic expectations prevail during this phase.

Phase 4: Recovery/Expansion

• The trough is the lowest point of the business cycle.
• Low interest rates encourage investment and spending.
• Confidence and optimism return, leading to economic growth.

This quiz covers the key concepts of GDP and GNP, including their definitions, calculations, and differences. Learn how to distinguish between these two important economic indicators.