Cambridge A Level Economics: National income statistics and the circular flow (9708) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover sections 4.1 and 4.2 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. They are AS Level content, assumed knowledge for A Level Papers 3 and 4. All countries and figures are invented, and money is in billion currency units (cu) a year. Read the study guide and the revision notes first if you need to. The course hub, the printable checklist and the free diagnostics are also linked.

Questions

1. Define national income. [2]

2. Distinguish between gross domestic product (GDP) and gross national income (GNI). [3]

3. Country K has GDP at market prices of 275. Taxes on products are 33 and subsidies on products are 8.

(a) Calculate GDP at basic prices. [2] (b) A lamp sells for 96 cu including a product tax of 16 cu. The maker also receives a subsidy of 5 cu per lamp. Calculate the basic price of the lamp. [2] (c) Explain why the basic price shows what the producer receives better than the market price does. [2]

4. Country L has GDP of 420. Its residents earn 26 abroad and foreign owners of factors in Country L take 41 out.

(a) Calculate GNI. [2] (b) Explain why GNI is lower than GDP in Country L. [2]

5. Country P has GNI of 760 and depreciation of 85.

(a) Calculate NNI. [1] (b) Calculate depreciation as a percentage of GNI, to one decimal place. [1] (c) Explain why NNI may be a better guide than GNI to the income that can be spent without running down the capital stock. [2]

6. Country M has GDP at basic prices of 1,180. Taxes on products are 150 and subsidies on products are 45. Residents earn 60 abroad and 84 is paid abroad to foreign owners of factors. Depreciation is 130.

(a) Calculate GDP at market prices. [2] (b) Calculate GNI at market prices. [2] (c) Calculate NNI at market prices. [1] (d) Calculate NNI at basic prices. [2]

7. State whether each is an injection or a leakage in an open economy.

(a) A firm buys a new machine. [1] (b) A household puts part of its income into a savings account. [1] (c) Overseas customers buy a country’s cars. [1] (d) A household pays income tax. [1] (e) A household buys a foreign-made phone. [1] (f) The government pays for a new school building. [1]

8. Describe the circular flow of income in a closed economy with households, firms and a government. [5]

9. In Country N, savings are 45, taxes 80 and imports 60. Investment is 70, government spending 90 and exports 40.

(a) Calculate total leakages and total injections. [2] (b) State and explain the direction of change in national income. [3] (c) State the condition that holds when national income has settled at its new level. [1]

10. Country O is in equilibrium. Savings are 30, taxes 50 and imports 40. Investment is 45, government spending 55 and exports 20. Exports then fall to 8.

(a) Show that Country O was in equilibrium before the fall. [2] (b) Calculate the net injection or net leakage after the fall and state the effect on national income. [3] (c) Explain why national income does not go on falling indefinitely. [3]

11. Countries J and K each have GDP of 500. In Country J, residents earn 20 abroad and 80 is paid to foreign owners of factors. In Country K, residents earn 90 abroad and 30 is paid out.

(a) Calculate the GNI of each country. [2] (b) Evaluate whether GNI gives a better comparison than GDP of the incomes of the two countries’ residents. [6]

Answers

1. National income is the worth of everything produced in an economy [1], together with the incomes earned from producing it, over a period of time such as a year [1]. [2] Examiner insight: A definition is stronger when it names the period. A flow measured over time should not be described as a total held at one date.

2. GDP is the total value of final goods and services made inside the country over a year [1], whoever owns the factors of production [1]. GNI is GDP plus net primary income from abroad [1], so it measures the income of a country’s residents and their factors. [3] Examiner insight: Distinction questions need both measures described and the contrast made clear. Defining only GDP leaves the comparison unfinished.

3. (a) Net adjustment = 33 - 8 = 25 [1]. GDP at basic prices = 275 - 25 = 250 [1]. (b) Basic price = 96 - 16 + 5 [1] = 85 cu [1]. (c) The product tax goes to the government, not the producer [1]. A subsidy is paid to the producer, so the producer receives more than the buyer’s price implies [1]. [6] Examiner insight: Show the signs on both adjustments. Taxes come off and subsidies go on, and writing the two together makes sign slips easier to trace.

4. (a) Net primary income = 26 - 41 = -15 [1]. GNI = 420 - 15 = 405 [1]. (b) More income leaves the country, paid to foreign owners of factors working there, than residents earn abroad [1]. Net primary income is negative, so GNI is below GDP [1]. [4] Examiner insight: Explain in terms of the direction of the income flows. A bare statement that GNI is smaller does not show you understand the link.

5. (a) NNI = 760 - 85 = 675 [1]. (b) 85 / 760 x 100 = 11.2% [1]. (c) Part of gross income only replaces capital that has worn out [1]. NNI removes depreciation, so it shows income that can be consumed or saved while keeping the capital stock intact [1]. [4] Examiner insight: Link depreciation to the replacement of capital, not to a fall in output. Also give the percentage with its unit and the requested rounding.

6. (a) Net adjustment = 150 - 45 = 105 [1]. GDP at market prices = 1,180 + 105 = 1,285 [1]. (b) Net primary income = 60 - 84 = -24 [1]. GNI = 1,285 - 24 = 1,261 [1]. (c) NNI = 1,261 - 130 = 1,131 [1]. (d) NNI at basic prices = 1,131 - 105 [1] = 1,026 [1]. [7] Examiner insight: Set the working out as separate labelled lines. A later slip can then be traced, whereas an unexplained final number gives the reader nothing to follow.

7. (a) Injection, as investment [1]. (b) Leakage, as savings [1]. (c) Injection, as exports [1]. (d) Leakage, as taxes [1]. (e) Leakage, as imports [1]. (f) Injection, as government spending [1]. [6] Examiner insight: Give the label and, where space allows, the category. Naming the type shows why the item belongs there.

8. Households supply factors of production to firms [1]. Firms pay incomes to households as wages, rent, interest and profit [1]. Households spend part of that income on firms’ goods and services [1]. Households and firms pay taxes to the government, and the government spends on goods and services and on transfer payments [1]. Saving is a leakage and investment is an injection, so some income leaves the flow and some enters [1]. [5] Examiner insight: Describe the direction of each flow. A description that only names the three sectors, without saying what moves between them, gains little.

9. (a) Leakages = 45 + 80 + 60 = 185 [1]. Injections = 70 + 90 + 40 = 200 [1]. (b) Injections exceed leakages by 15 [1]. Spending is more than the income leaving the flow, so firms produce more [1]. National income rises [1]. (c) Injections equal leakages [1]. [6] Examiner insight: Give the size of the gap and the direction. Naming the two totals and subtracting them shows the reasoning rather than asserting the result.

10. (a) Leakages = 30 + 50 + 40 = 120 [1]. Injections = 45 + 55 + 20 = 120, so they are equal [1]. (b) Injections = 45 + 55 + 8 = 108 [1]. Net leakage = 120 - 108 = 12 [1]. National income falls [1]. (c) Leakages such as savings, taxes and imports depend on national income, so they fall as income falls [1]. Income keeps falling until leakages have fallen to 108 [1]. At that point leakages equal injections and a new, lower equilibrium is reached [1]. [8] Examiner insight: A chain of reasoning earns credit when each step leads to the next. Say what happens to leakages as income falls, not only that income stops falling.

11. (a) Country J: 500 + (20 - 80) = 440 [1]. Country K: 500 + (90 - 30) = 560 [1]. (b) GNI counts income received by residents and their factors wherever it is earned [1]. GDP is the same in both, but the incomes available to residents differ by 120, so GNI shows that Country K’s residents have more income [1]. Foreign ownership explains the gap in Country J: output is produced there, but part of the income goes abroad [1]. On the other hand, GDP is a better guide to the output and employment created inside a country [1]. Neither figure shows how income is shared among residents [1]. Overall, GNI gives the better comparison of residents’ income, provided the aim is income received and not production or jobs [1]. [8] Examiner insight: An evaluation needs a judgement that depends on the purpose of the comparison. Listing points for each measure, without a conclusion that says which is better for what, stays at the level of description.

Where marks are usually lost

• Adding taxes on products when moving from market to basic prices, or the reverse.
• Using depreciation to move between GDP and GNI.
• Losing the minus sign on a negative net primary income.
• Giving a final answer with no units or no working lines.
• Counting a transfer payment, or bank lending, as an injection.
• Saying income “rises” or “falls” without the totals of injections and leakages that cause it.
• Writing that equilibrium is when injections and leakages are zero, not equal.
• Defining GDP without final goods or without the time period.
• Offering an evaluation as two lists with no judgement.

Next steps

• Review the revision notes and the study guide.
• Return to the course hub and the printable checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 4.1 and 4.2 (Cambridge University Press & Assessment).