Sample IB Question-Past Paper 1

4. a. Analyse the methods by which Gross Domestic Product (GDP) may be measured.

Outline:

• Define analyze.
• Break down in order to bring out the essential elements or structure.
• Define GDP.
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• Explain components of GDP.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• 3 methods for analyzing GDP:
• Expenditure method.
• Explain how it's calculated.
• Income method.
• Explain how it's calculated.
• Output method.
• Explain how it's calculated.
• Add diagram of circular flow of income.
• Explain diagram.
• Include example if appropriate.

Answer to Question:

This essay will break down the methods by which GDP may be measured in order to bring out the essential elements or structure. GDP can be defined as the measure of all incomes within the borders of the country, regardless of who owns the assets. GDP has the following components: GDP = I + C + G + (net exports). I = investment, C = consumption, G = government expenditures, and net exports = exports minus imports.

Figure 1.3: The different methods of measuring GDP.

There are the three methods for analyzing GDP: the income, expenditure, and output method. The income method is calculated by adding up all of the "rent, wages, interest, and profits" in order to measure GDP. This method refers to c. The expenditure method measures a. It measures the total expenditures on goods and services in the economy to find GDP. The output method, however, measures b, which is done by looking at the value of the output of the goods and services.

The circular flow of income model (figure 1.3) shows a very basic way of understanding economic activity. Households spend money on goods and services (a), and provide land, labor, capital, and management as factors of production. Firms receive the factors of production and money, and in turn grant households wages, rent, interest, and profit (c), as well as the goods and services (b) that they purchased. So, the households receive goods and services, as well as the components of (c). This model, however, doesn't address injections and outflows, and hence is a very simple model.

All three methods of measuring GDP should yield the same value more or less - they are simply different methods of finding the same value.

4. b. “Using real Gross Domestic Product (GDP) data is a very useful means of comparing economic activity between countries.” Discuss this statement.

Outline:

• Define discuss:
• Offer a considered and balanced review that includes a range of arguments, factors, or hypotheses.
• Define GDP:
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• Claim:
• Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity.
• Counterclaim:
• However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.
• Conclusion:
• While GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.

Answer to question:

This essay will offer a considered and balanced review that includes a range of arguments, factors, or hypotheses in order to answer the question above. GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets. Its components are: GDP = I + C + G + (net exports), where I = Investment, C = Consumption, G = Government expenditure, and (net exports) = Exports minus Imports. Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity. 

However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.

To conclude, while GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.