Explain the impact that a cut in taxation and an increase in government spending might have on the circular flow of income.

Discuss whether the real gross national income (GNI) per capita of a country is a good indicator of its standard of living.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of the circular flow of income (model), (indirect/direct) taxation, government spending
• diagram of the circular flow of income showing injections and leakages
• explanation of the impact a cut in taxation and an increase in government spending will have on the circular flow of income, with leakages being reduced and injections being increased, resulting in an increased (flow of) income, ceteris paribus
• example(s) of expansionary fiscal policy in practice.

Award a maximum of level 2 marks if a candidate only refers to either a cut in taxation or an increase in government spending (but not both).

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of real GNI(GNP) per capita
• a diagram is not required for full marks, but candidates may use diagram(s) to show inequality in the distribution of income, negative externalities in production/consumption,economic growth
• explanation why the real GNI per capita might be regarded as a good indicator of the standard of living, such as higher average income leading to higher consumption, greater tax revenue for public services, less poverty
• examples of countries with different GNI per capita resulting in different standards of living and/or countries where there is discrepancy between the standard of living and the level of real GNI per capita
• synthesis or evaluation (discuss).

Discussion may include: consideration of the limitations of using real GNI per capita to measure the standard of living such as the lack of information about the distribution of income and the composition of output, measurement problems and non-income factors (leisure time, quality of environment) affecting the well-being of the population; consideration of alternative measures such as HDI and “green GDP” per capita; consideration of the meaning of “standard of living”.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.