Recession and recovery in Dovania

Read the extracts and answer the questions that follow.

Text A — Fluctuations in output

1. Dovania's economy reached a peak before falling into a broad contraction. After three quarters of declining real GDP, the economy reached a trough. Actual output remained below its long-term trend.

2. Lower consumer confidence increased saving. Falling tax revenue reduced the government's ability to maintain spending, while export revenue declined because trading partners were also in recession.

3. A later recovery was supported by renewed investment and exports. Economists warned that slower positive growth should not be confused with falling output.

Text B — Measuring residents' income

1. Many Dovanian residents work temporarily abroad. Their wages earned from production abroad are included when calculating gross national income (GNI). However, simple transfers from relatives abroad are not primary income from current production.

2. Real GNI per capita has recovered, but surveys indicate continuing insecurity and low life satisfaction.

Table 1 — Expenditure components

Nominal expenditure components of Dovania's economy

Table 2 — Population and income

Population and income in Dovania

Foreign ownership and national income in Estara

Read the extracts and answer the questions that follow.

Text A — GDP and GNI

1. Foreign-owned mining firms account for a large share of Estara's production. Their output is included in nominal GDP because it is produced inside Estara. Much of their profit is paid to non-resident owners as primary income.

2. Estaran-owned firms also operate abroad, but the income they return is smaller. As a result, Estara's GNI is below its GDP.

3. Mining exports are an important injection into the circular flow. A fall in world commodity demand recently reduced export revenue and moved the economy into contraction.

Text B — Sustainability

1. Mining has increased average material consumption and government revenue, but it has also depleted resources and polluted rivers. The government is considering the Happy Planet Index alongside real GNI per capita.

2. Officials note that the index emphasizes sustainable well-being but depends on estimates of ecological footprints and subjective well-being.

Table 1 — GDP and cross-border income

Estara's nominal GDP, cross-border primary income and short-run output assumptions.

Table 2 — Nominal and real output

Estara's nominal output, GDP deflator and short-run output assumptions.

Population growth and output in Faron

Read the extracts and answer the questions that follow.

Text A — Growth in total output

1. Faron recorded positive real GDP growth, but its population grew more rapidly. Economists emphasize that real GDP per capita is an average and does not show how output is distributed.

2. Higher government spending and investment supported economic activity. However, taxes and imports also increased. Officials monitor whether total injections exceed total leakages.

3. The economy is currently recovering from a trough, although actual output remains below its potential-output trend.

Text B — Measuring life evaluation

1. Faron publishes a Happiness Index based on reported life evaluation and factors including real GDP per capita, social support, healthy life expectancy, freedom, generosity and perceptions of corruption.

2. Survey scores have fallen despite rising total GDP. Housing shortages, pollution and longer commuting times may explain the change, although cultural expectations can affect survey answers.

Table 1 — Real output and population

Real GDP and population in Faron

Table 2 — Circular-flow data

Annual circular-flow injections and leakages in Faron.

Nominal growth and statistical revisions in Galena

Read the extracts and answer the questions that follow. The two tables refer to the same period.

Text A — Interpreting growth

1. Galena's nominal GDP rose rapidly, but much of the increase reflected higher prices. The statistical agency therefore calculated real GDP using a GDP deflator.

2. Initial GDP estimates were later revised after surveys revealed previously unrecorded digital services. Such revisions do not invalidate national accounting, but show that it is not a perfect inventory.

3. Rising investment supported an expansion. Subsequently, higher saving and imports reduced spending on domestically produced output.

Text B — Comparing methods

1. Galena estimates GDP using output, income and expenditure. The totals should be equivalent because expenditure on production generates income, but measurement errors create a statistical discrepancy.

2. Officials are also examining economic well-being, including material security, health, leisure and environmental quality, rather than assuming it changes in proportion to GDP.

Table 1 — GDP data

Galena GDP data for the same period as Table 2

Table 2 — Expenditure data

Table 2. Galena expenditure-approach GDP components for the same period as Table 1.

Comparing living standards in Hesperia

Read the extracts and answer the questions that follow.

Text A — Exchange-rate and PPP comparisons

1. Hesperia's currency buys fewer foreign currencies than it did previously, but many non-traded services remain inexpensive domestically. Market-exchange-rate conversion therefore produces a lower income estimate than conversion using purchasing power parity (PPP).

2. Hesperia's population and prices have both increased. Economists use real per-capita figures when comparing living standards over time.

3. An export recovery has moved actual output upward from a trough. Nevertheless, actual output remains below potential output.

Text B — Alternative indices

1. The government uses an OECD Better Life Index dashboard. Citizens can change the weights assigned to housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety and work-life balance.

2. Different weights produce different rankings. Comparable information is also unavailable for some lower-income countries.

Table 1 — Income and population

Table 1: Income and population in Hesperia

Table 2 — Conversion rates

Conversion rates for Hesperia's currency.

Circular flows in Ilyria

Read the extracts and answer the questions that follow.

Text A — Injections and leakages

1. Ilyria's statistical agency uses a circular flow of income model to explain interactions among households, firms, government, the financial sector and the foreign sector.

2. A surge in exports and investment moved Ilyria into expansion. Later, households saved more, tax receipts increased and imports rose. Policymakers are concerned that total leakages may now exceed injections.

3. The government does not include pension transfer payments in government purchases when applying the expenditure method because these transfers are not payments for current output.

Text B — Output and well-being

1. Ilyria's real GDP per capita has risen, but river pollution and income inequality have worsened. Officials are considering an index that includes sustainability and subjective well-being.

2. Critics warn that national income accounting records economic activity rather than every determinant of welfare.

Table 1 — Expenditure components

Ilyria's expenditure components.

Table 2 — Injections and leakages

Ilyria’s injections and leakages.

Digital activity and well-being in Kalmia

Read the extracts and answer the questions that follow.

Text A — Measuring a changing economy

1. Kalmia's digital sector has expanded. Some online services are supplied free of charge, while informal workers receive cash payments that are not reported. This makes the output approach difficult to apply accurately.

2. Statistical officials avoid double counting by summing value added. Revised surveys have raised estimated GDP, even though no new production occurred at the date of revision.

3. Increased investment in digital infrastructure and exports of software supported an expansion. Higher imports of computer equipment partly offset these injections.

Text B — Life satisfaction

1. Kalmia's government publishes a Happiness Index. It includes reported life evaluation, social support, healthy life expectancy, freedom, generosity and perceptions of corruption.

2. Digital services may improve convenience without being fully reflected in GDP. However, excessive screen time, job insecurity and unequal internet access may reduce well-being.

Table 1 — Value added in the digital supply chain

Output and intermediate-input expenditure in Kalmia's digital supply chain.

Table 2 — Nominal GDP and GDP deflator for Kalmia

Nominal GDP and GDP deflator for Kalmia.

Comparing living standards in Aralia and Belluno

Aralia and Belluno have similar populations, but market exchange rates and domestic price levels differ substantially. Aralia has experienced rapid output growth together with increasing pollution and longer working hours. Belluno has slower output growth but stronger health and environmental outcomes.

Table 1: National income and population data

National income, population and currency-conversion data

Table 2: Selected well-being indicators

Selected well-being indicators for Aralia and Belluno.

Both governments are deciding which statistic should receive the greatest weight when assessing progress.

The business cycle in Cyrenia

Cyrenia experienced an expansion followed by a contraction. Its statistical agency estimates potential output, although these estimates are revised as new information becomes available. The government wants to determine whether the latest rise in GDP represents a sustained recovery in economic well-being.

Table 1: Cyrenia's nominal GDP and GDP deflator

Cyrenia's nominal GDP and GDP deflator, 2021–2024.

Table 2: Actual and potential real GDP

Actual and estimated potential real GDP in Cyrenia.

Population increased from 25.0 million in 2021 to 25.8 million in 2024.

GDP and GNI in Faron

Faron hosts many foreign-owned mining companies. Their output is produced inside Faron, but a large proportion of profits is paid to non-resident owners. At the same time, some Faronian residents work abroad and earn wages there. The government has traditionally presented GDP per capita as its headline measure of prosperity.

Table 1: National income data for Faron

National income data for Faron

Table 2: Population and distributional data

Population and distributional data for Faron.

The mining sector has also caused water pollution in some rural communities.

Reconstruction and measured output in Jorvik

Read the extracts and answer the questions that follow.

Text A — A natural disaster

1. A major storm destroyed homes and infrastructure in Jorvik. Production fell sharply, moving actual real GDP below its long-term growth trend. The economy entered a contraction.

2. Reconstruction later increased government spending and investment. These activities raised measured GDP, although much of the expenditure merely replaced destroyed assets rather than increasing households' net well-being.

3. Unpaid community rebuilding and losses of leisure were not fully recorded. Statistical officials also found it difficult to value environmental damage.

Text B — Income received by residents

1. Foreign construction firms earned substantial profits in Jorvik and sent them abroad. As a result, GDP exceeded GNI. Economists calculated net primary income from abroad to connect the two measures.

2. The government is considering health, housing security and environmental indicators alongside national income data.

Table 1 — Expenditure after reconstruction began

Jorvik expenditure components after reconstruction began.

Table 2 — GDP and primary income

GDP and primary income flows in Jorvik after reconstruction began.

Sustainable well-being in Lydora

Read the extracts and answer the questions that follow.

Text A — Growth and resource use

1. Lydora's economy expanded rapidly as timber exports increased. The resulting export revenue was an injection into the circular flow, but deforestation reduced biodiversity and increased flood risks.

2. Actual real GDP temporarily moved above potential output as workers completed unusually long shifts. Economists warned that this level of resource use could not be sustained without increasing inflationary pressure and environmental damage.

3. When foreign demand weakened, exports fell and the economy moved toward contraction. The government increased spending on forest restoration.

Text B — Alternative measures

1. Lydora reports real GNI per capita at PPP and the Happy Planet Index. The latter evaluates how efficiently long, satisfying lives are achieved using ecological resources.

2. Real income captures material purchasing power, while the index captures sustainability. However, ecological footprints and subjective well-being are estimated imperfectly.

Table 1 — GNI data

Table 1: Nominal GNI and GNI price deflator for Lydora

Table 2 — PPP and population data

Population and PPP conversion data for Lydora.

A well-being framework for Galena

Galena's government is considering supplementing national income statistics with a composite well-being indicator. It has shortlisted measures based on the OECD Better Life Index, the Happiness Index and the Happy Planet Index.

For an initial pilot, each dimension is scored from 0 to 10. The pilot Better Life Score is a weighted arithmetic mean. The pilot Sustainable Well-being Score is calculated as:

Table 1

Galena's national income data

Table 2

Pilot well-being scores and Better Life Score weights for Galena.

The government recognizes that the pilot formulas are simplified and that the choice of weights involves value judgements.