3.1 Measuring Economic Activity Flashcards
Three ways to measure the value of total output
- Total income - Adds up all income earned by the factors of production in a country over a period of time.
- Total output of goods and services - Adds up the value of all final goods and services produced in a country over a period of time.
- Total expenditure - Adds up all the spending on final goods and services produced within a country over a period of time.
Gross Domestic Product
The market value of all final goods and services produced in a country over a time period (usually a year).
It includes spending by the four components:
Consumer expenditure + Investment + Government spending + (Exports − Imports)
GDP = C + I + G + (X − M)
GDP measures
Only include current production, i.e. only items produced within the current period, and only items that include production.
Thus, GDP excludes:
* Second-hand products
*Transfer of wealth, e.g. purchase of shares
* Government transfers, e.g. welfare payments
Gross National Income
The total income received by the residents of a country, which equals to the value of all final goods and services produced by the factors of production supplied by the country’s residents regardless where they are located.
GNI = GDP + Net Income from Abroad
GNI = GDP + (Incomes sent from abroad to domestic country – incomes sent from domestic country to abroad)
Measures of economic activity: total
Measure the value of output and income (such as GDP and GNI), provide a summary statement of the overall size of an economy.
Measures of economic activity: per capita
Per capita (per head) figures are useful as a summary measure of the standard of living in a country, because they provide an indication of how much of total output in the economy corresponds to each person in the population on average.
Use of national income statistics
- Comparisons over time
Countries can measure growth and make comparisons over time. - Comparisons between countries
Countries are able to compare the size of their economies.
Limitations of national income statistics
- Excludes non-marketed goods & services, e.g., voluntary work.
- Does not include the underground economy, e.g., illegal goods.
- Does not reflect improved product quality.
- Negative externalities are NOT considered.
- Ignores all social aspects of human life such as income distribution, access to health care and education, life expectancy, gender equality, well being, happiness, a reduction of crime or better relationships with society, with other countries is not considered.
Nominal GDP
Measures the value of a nation’s output produced in a year, expressed in the value of the prices charged for that year.
Real GDP
Measures the value of a nation’s output in a particular year adjusted for changes in the price level from a base year.
Peak/Boom (Business Cycle)
Stage 1
- High levels of consumer spending
- increased profits
- high business confidence
- increased investment
- Prices and costs tend to rise faster.
Unemployment tends to be low as growth in the economy creates new jobs.
Contraction (Business Cyclce)
Stage 2
- Falling levels of consumer spending and confidence
- lower profits for businesses
- businesses start to cut back on investment
- Spare capacity increases + rising unemployment as businesses cut back and reduce stocks.
rGDP growth decreases, and rGDP may eventually also decrease.
Trough (Business Cycle
Stage 3
- A prolonged period of declining GDP where there is very weak consumer spending and business investment
- many business failures.
Unemployment rapidly rises; price level may start falling (deflation)
Expansion (Business Cycle)
Stage 4
- Consumers begin to increase spending
- businesses feel a little more confident
- start to invest again and build stocks.
Note it takes time for unemployment to decrease, but rGDP does increase.
Relationship between output and employment
When real GDP grows in the expansion phase, unemployment falls
In the contraction phase when real GDP falls, unemployment increases.
