Unit notes and practice questions

Grade 11 Economics unit 3: National income accounting

Everything here is for unit 3 of the Grade 11 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

5
Cards: 10
Practice questions on unit 3: 70–90
The textbook pages for unit 3

What unit 3 covers

1.Nature of National Income Account and Its importance
2.The Concept of Gross Domestic Product (GDP) and Gross National Product(GNP)
3.The Concept of Gross Domestic Product (GDP)
4.The concept of Gross National Product (GNP)
5.Approaches of Measuring National Income (GDP/GNP)
6.The Expenditure Approach
7.The Income Approach
8.Product or Value-added Approach
9.Circular Flow of Income and the GDP
10.Problems with GDP Measurement
11.The GDP Deflator and the Consumer Price Index
12.Nominal and Real GDP values
13.The GDP Deflator and other Measures of General Price
14.Other Measures of National Income Account
15.GDP and Income Distribution

Short notes for unit 3

The cards filed under this chapter on the Grade 11 Economics page. Open one at a time.

Double Counting Intermediate GoodsCommon mistake

When you use it

Avoid this error when calculating GDP by expenditure or value added methods.

Watch out

Do not add the price of intermediate inputs to the final good price. Only count the final value or the value added at each stage.

Drafted from Grade 11 Economics, pages 70-90, then checked twice before it went up

GDP DeflatorFormula

\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100

\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100

$\text{GDP Deflator}$: GDP price deflator index $1$
$\text{Nominal GDP}$: GDP at current prices $\text{ETB}$
$\text{Real GDP}$: GDP at constant base year prices $\text{ETB}$

When you use it

Use this to measure changes in the overall price level of output relative to the base year.

Watch out

Real GDP in the denominator uses base year prices while Nominal GDP in the numerator uses current prices.

Drafted from Grade 11 Economics, pages 70-90, then checked twice before it went up

GDP Expenditure ApproachFormula

\text{GDP} = C + I + G + (X - M)

\text{GDP} = C + I + G + (X - M)

$\text{GDP}$: Gross domestic product $\text{ETB}$
$C$: Consumption spending $\text{ETB}$
$I$: Investment spending $\text{ETB}$
$G$: Government spending $\text{ETB}$
$X$: Exports $\text{ETB}$
$M$: Imports $\text{ETB}$

When you use it

Use this to calculate Gross Domestic Product by summing the spending of all sectors in the economy.

Watch out

Always subtract imports from exports so that spending on foreign goods is not counted as domestic production.

Drafted from Grade 11 Economics, pages 70-90, then checked twice before it went up

GNP from GDPFormula

\text{GNP} = \text{GDP} + \text{NFFI}

\text{GNP} = \text{GDP} + \text{NFFI}

$\text{GNP}$: Gross national product $\text{ETB}$
$\text{GDP}$: Gross domestic product $\text{ETB}$
$\text{NFFI}$: Net foreign factor income $\text{ETB}$

When you use it

Use this to convert Gross Domestic Product to Gross National Product using net foreign factor income.

Watch out

Foreign income earned inside the country is subtracted while national income earned abroad is added.

Drafted from Grade 11 Economics, pages 70-90, then checked twice before it went up

Inflation Rate from CPIFormula

\text{Inflation Rate} = \frac{\text{CPI}_{2} - \text{CPI}_{1}}{\text{CPI}_{1}} \times 100

\text{Inflation Rate} = \frac{\text{CPI}_{2} - \text{CPI}_{1}}{\text{CPI}_{1}} \times 100

$\text{Inflation Rate}$: Inflation rate $\%$
$\text{CPI}_{2}$: Consumer price index in period 2 $1$
$\text{CPI}_{1}$: Consumer price index in period 1 $1$

When you use it

Use this to calculate the percentage rate of inflation between two time periods.

Watch out

Always divide by the initial period index in the denominator and not the new period index.

Drafted from Grade 11 Economics, pages 70-90, then checked twice before it went up

Practice questions on unit 3

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

What is Gross Domestic Product (GDP)?

A.The total market value of all final goods and services produced within a country's borders in a year
B.The total value of goods produced only by citizens living in foreign countries
C.The accumulated wealth and assets of all households at a single point in time
D.The total sales revenue of intermediate inputs bought by businesses

Show the answer and why

Answer: A The total market value of all final goods and services produced within a country's borders in a year

Why

GDP is defined as the total market value of all final goods and services produced annually within a country's borders, regardless of who owns the production resources.

Question 2

Why is GDP classified as a flow concept rather than a stock measure?

A.Because it is measured at a single fixed point in time
B.Because it measures economic activity per unit of time rather than accumulated wealth
C.Because it only counts physical money circulating in banks
D.Because it never changes from one year to the next

Show the answer and why

Answer: B Because it measures economic activity per unit of time rather than accumulated wealth

Why

A flow is a quantity measured per unit of time (such as output produced over one year), whereas a stock is measured at a specific point in time.

Question 3

Under the expenditure approach, which equation correctly represents the calculation of GDP?

A.GDP = C + I + G + NX
B.GDP = C + I - G - NX
C.GDP = C + I + G - Net Foreign Factor Income
D.GDP = C + I + Depreciation + Indirect Taxes

Show the answer and why

Answer: A GDP = C + I + G + NX

Why

Under the expenditure approach, GDP is the sum of personal consumption (C), business investment (I), government spending (G), and net exports (NX).

Question 4

In consumer spending (C), how are durable goods defined?

A.Goods that are consumed immediately during production
B.Services provided by teachers and doctors
C.Goods whose expected lifespan is more than 3 years
D.Goods bought solely by the government

Show the answer and why

Answer: C Goods whose expected lifespan is more than 3 years

Why

Durable goods are defined as items expected to last for more than 3 years, such as household furniture, beds, and tables.

Question 5

An Ethiopian citizen owns a commercial building in New York and earns rental income from it. How is this rental income treated in national accounts?

A.It is included in Ethiopia's GDP and USA's GNP
B.It is included in Ethiopia's GNP and USA's GDP
C.It is excluded from both countries' accounts
D.It is counted only in Ethiopia's GDP

Show the answer and why

Answer: B It is included in Ethiopia's GNP and USA's GDP

Why

Because the building is located in the USA, the production takes place within US borders (USA GDP). Because the owner is an Ethiopian national, the income is part of Ethiopia's GNP.

Question 6

If an economy has a Gross Domestic Product (GDP) of 500 billion birr and a capital consumption allowance (depreciation) of 45 billion birr, what is its Net Domestic Product (NDP)?

A.545 billion birr
B.455 billion birr
C.500 billion birr
D.22.5 billion birr

Show the answer and why

Answer: B 455 billion birr

Why

Net Domestic Product is calculated as: NDP = GDP - Capital consumption allowance. Therefore, 500 billion - 45 billion = 455 billion birr.

Question 7

A farmer sells wheat to a miller for 1,000 birr. The miller processes the wheat into flour and sells it to a baker for 1,400 birr. The baker makes bread and sells it to consumers for 2,000 birr. What is the total value added to GDP?

A.4,400 birr
B.1,000 birr
C.2,000 birr
D.3,400 birr

Show the answer and why

Answer: C 2,000 birr

Why

Value added is the sum of contributions at each stage: 1,000 birr (farmer) + 400 birr (miller) + 600 birr (baker) = 2,000 birr, which equals the final price of the bread.

Question 8

Which of the following is a correct difference between the Consumer Price Index (CPI) and the GDP deflator?

A.The CPI includes imported consumer goods, while the GDP deflator includes only domestically produced goods
B.The GDP deflator uses a fixed basket of goods, while CPI allows the basket to change
C.The CPI measures goods bought by firms and government, while GDP deflator does not
D.The GDP deflator always excludes capital equipment produced at home

Show the answer and why

Answer: A The CPI includes imported consumer goods, while the GDP deflator includes only domestically produced goods

Why

The GDP deflator includes only goods produced domestically, so imported goods do not appear in it. In contrast, the CPI includes consumer items that may be imported from abroad.

Question 9

In a given year, an economy records a nominal GDP of 600 million birr and a real GDP of 480 million birr. What is the GDP deflator for that year?

A.80
B.120
C.125
D.150

Show the answer and why

Answer: C 125

Why

GDP deflator = (Nominal GDP / Real GDP) * 100. Here, (600 / 480) * 100 = 1.25 * 100 = 125.

Question 10

Suppose the Consumer Price Index (CPI) of an economy is 120 in Year 1 and 150 in Year 2. What is the annual inflation rate?

A.30.0%
B.25.0%
C.20.0%
D.15.0%

Show the answer and why

Answer: B 25.0%

Why

The inflation rate is computed as ((CPI_Y2 - CPI_Y1) / CPI_Y1) * 100%. Thus, ((150 - 120) / 120) * 100% = (30 / 120) * 100% = 25%.

The app holds 12 questions on this unit, marked as you go. These are the first 10.

The textbook pages for unit 3

Unit 3 runs from page 70 to page 90 of the Ministry of Education edition.

Ministry of Education edition, English, 202 pages

Download the PDF

All Grade 11 Economics short notes

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