NATIONAL INCOME AND ECONOMIC GROWTH

SAMPLE QUESTION:

(i) Define gross domestic product and gross national

product.

(ii) Which of these terms do you consider to be a more useful measure of economic activity for Ireland? Explain your answer.

Solution:

(i) Gross domestic product is the total output produced (value of goods and services) by the factors of production in the domestic economy irrespective of whether the factors are owned by Irish nationals or foreigners.

Gross national product is the total output produced (value of goods and services) by Irish-owned factors of production in Ireland and elsewhere. It is the measure of the income accruing to a country’s residents.

(ii)The difference between GDP and GNP is significant in Ireland. GDP is larger than GNP in Ireland’s case, as NFIA (net factor income from abroad) is a relatively large negative due to:

1. Profits earned by MNCs and repatriated back to their home countries is greater than the profits earned by Irish MNCs located abroad and returned to Ireland. 2. The interest payments on the foreign elements of Ireland’s debt.

3. The remittances (money sent back home) of immigrants in Ireland sent abroad is larger than the monies sent back to Ireland by Irish emigrants living abroad.

Therefore, GNP is a better measure of Irish economic activity (and our standard of living) as GNP reflects only the part of economic activity that is produced and shared by Irish nationals. However, GDP is often used for comparisons with other EU countries and it is generally easier to measure. (i) Define the term marginal propensity to save (MPS). (ii) Calculate the MPS for this economy illustrated in the table above.

(iii) Calculate the value of the multiplier in this open economy.

(iv) How much will the Government have to inject into this economy if it wants the economy to operate at its full employment level? Show your workings.

SAMPLE QUESTION:

Irish economic growth has outpaced average EU growth rates in recent years, making Ireland the fastest growing economy in the EU.

Discuss the factors that have contributed to Ireland’s recent rates of economic growth.

Solution:

Increased consumer spending: due to decreasing unemployment rates (down to 6.1% in January 2018, from 7.1% 12 months previously) and job creation staying positive, low interest rates and more availability of credit, there is increased aggregate demand and spending in the economy, contributing to the level of economic growth.

Increased investment: due to the very low interest rates in Ireland (as dictated by the ECB base interest rate of 0% at present) and low corporation tax (12.5%), there has been an increased level of indigenous and foreign investment in Ireland.

Decreased saving: due to low interest rates and increasing consumer confidence, less people are saving and more people are spending and investing, contributing to the increased economic growth. Government fiscal policy: the 2015 budget was the first in seven years to introduce tax cuts and increased government spending and the 2016, 2017 and 2018 budgets have followed with the same approach. Tax cuts have increased disposable incomes and increased government expenditure is aimed towards public services which will aid economic growth. For example, the free pre-school for children before primary school scheme (now extended to two years), encourages more parents to work, therefore increasing aggregate demand.

Corporation tax: by maintaining low levels of corporation tax (at 12.5%, Ireland’s corporation tax is amongst the lowest in the world), Ireland has ensured it has continued to be a desirable location for indigenous and multinational companies to locate. This creates employment, increases aggregate demand and contributes to economic growth.

Exports: Ireland’s export sector has continued to grow, with a series of significant base metal deposits being made, including the giant ore deposit at Tara Mine. Zinc-lead ores are also being mined at Lisheen and Galmoy, now making Ireland the largest zinc producer in Europe and the second largest producer of lead. There has been a massive rise in Irish medical devices and pharmaceutical exports also.

Banking sector: Irish banks are more stable again and are lending sensibly and under regulation (e.g. the Central Bank of Ireland’s new mortgage restrictions). ECB interest rates continue to fall. The base interest rate decreased to 0% in March 2016, down from 0.05%. The aim is to further stimulate the eurozone economy, by encouraging borrowing and discouraging saving. The ECB plans to expand quantitative easing (cheap loans and liquidity at negative interest rates to financial institutions), essentially paying banks to increase credit to households and businesses. This injection of money is greatly stimulating further growth in the economy.