PART B

1) To what extent do measures of GDP accurately estimate national well-being?

Although GDP is one of the main measures to estimate national well-being, it does lack in
information. Here are a few things the GDP does not calculate:

- The raw GDP numbers don’t show where the products come from, as in what types of
goods and services are most popular. From the GDP we don’t know if they are demerit
goods or not.
- GDP doesn’t take into account volunteer work and community participation since no
money is made from it. However, this type of work and service shows a higher life
satisfaction.
- GDP doesn’t show distribution of income. We can’t tell how equally it is distributed and
the gap between the rich and the poor in the country.
- The GDP can also be misleading by either overestimating or underestimating the well-
being. Here are ways it overestimates:

- Negative externalities are still counted in positively in the GDP. For example a
production that has a negative effect on the environment should be considered as negative
for the well-being. However, GDP still counts the money made and from that number the
well-being seems better than it is.

- GDP doesn’t report the natural losses such as deforestation. Obviously this is harmful to
the environment and endangered animals but that is not shown in the GDP so the well-
being seems better.
- The GDP can also underestimate the well-being in these ways:
- Most countries have a rising life expectancy but that is not shown by the GDP.
- For some countries, the black market accounts for a lot of their money made but that is
not calculated into the GDP. So the country could be making a lot more money than the
numbers of the GDP.
- As mentioned before, only paid work is counted, volunteer work is not even though it
shows higher life satisfaction.
- Most markets improve their products, especially in technology. GDP doesn’t show that
improvement and quality.

The GDP only roughly indicates the society's standard of living. But because the GDP is only a
rough indicator, it does not directly account for leisure, environmental quality, levels of health
and education. Due to the existence of outliers in the society, the GDP may only reflect a
nation’s standard of living to a certain level, and hence they are not accounted for in the GDP.
Therefore, the GDP is not an accurate indicator of a nation’s well being.

2) Evaluate the effect of an increase in household savings on a nation’s economy.

- Household savings are the difference between a household's disposable income and their
consumption.
- When the household saves more, a lesser proportion of their income enters the market,
therefore causing consumption to fall and aggregate demand to decrease.
o When people save more, than the Marginal Propensity to Consume decreases,
therefore leading to a greater multiplier.
- Savings would slow down the flow of expenditure and eventually their income will
decrease.
- However, the money saved in banks are then made available to investors, either as capital
goods or by mortgaging houses.
o Keynsian spending multiplier

- In conclusion, an increase in household savings would cause the economy to suffer as a
result of decreased consumption. However, investors would inject the lost savings back
into the economy in the form of an investment, either as capital goods or houses. The
economy will either benefit or suffer based on whether or not these two forces will cancel
each other out or overpower one another.

3) Evaluate the role of interest rates in increasing economic growth.

- Interest rates are the amounts charged, usually expressed as a percentage of the loan, by a
lender to a borrower for the use of assets.
- Higher interest rates will lead to the following:
o Increased cost of borrowing from the bank
 Loans become more expensive, therefore people are discouraged from
borrowing loans from the bank.
o People will have less disposable income
 People who already have existing loans will have less disposable income,
therefore slowing down the flow of expenditure.
o More incentivised to save than to spend
 With higher interest rates, people will be more incentivised to save than to
spend, as they will earn more interest in their savings account.
o Decreased consumer confidence
 An increase in interest rates will discourage investments, therefore
consumers and firms will be less likely to make risky investments.
o Increases the value of a currency
 A stronger national currency will make their exports less competitive -
reducing exports and increasing imports. This will eventually reduce
aggregate demand in the economy.
- Lower interest rates will lead to the following:
o More investments
 Incentivise consumers/firms to invest more
 Hence lead to
o More consumption
 Less savings, because they will yield less returns
 Consumption leads to higher GDP; hence economic growth