3.1 Calculations and Measurements Flashcards
2 types & economic growth rate calc
economic growth
An increase in a country’s real Gross Domestic Product (real GDP) over time, indicating a rise in the quantity of goods and services produced.
There are two types:
1. Actual growth: An increase in real output due to better use of existing resources.
2. Potential growth: An increase in an economy’s productive capacity, often shown by an outward shift of the production possibilities curve (PPC) or long-run aggregate supply (LRAS).
Economic growth rate = percentage change in real GDP (N-O/O)
actual growth
Actual economic growth occurs when a country’s real GDP increases due to better or more efficient use of existing resources. It reflects improved utilisation of idle or underemployed factors of production.
* In the PPC model, actual growth is shown by a movement from a point inside the curve to a point closer to the curve’s boundary, indicating higher output using current capacity.
per capita
Per person. Per capita values are found by dividing the variable by the size of the population.
It is possible to look at economic activity in total, but economists also consider an average. This is referred to as per capita and means per person. To calculate per capita figures, the aggregate value is divided by the total population.
GNI
Gross National Income. The total income earned by a country’s residents (its nationals), regardless of where the factors of production are located, over a given time period.
It is calculated as:
GNI = GDP + net factor income from abroad
(income earned abroad by nationals – income paid to foreign factors in the domestic economy)
& equation
real GDP
The total value of all final goods and services produced in an economy in a given time period (usually one year), adjusted for changes in the price level (inflation or deflation). It reflects the economy’s actual output in constant prices.
Real GDP = Nominal GDP / GDP deflator
just equation
Real GDP or GNI per person (per capita)
Real GDP/GNI divided by the population of the country.
Real GDP per capita = GDP / population
real interest rates
The payment for borrowing or reward for saving, expressed as a percentage of the principal sum, adjusted for inflation. Real interest rates reflect the true cost of borrowing or the real return on savings after accounting for changes in purchasing power.
Nominal GDP
The total monetary value of all final goods and services produced in an economy in a given time period (usually one year), measured at current market prices without adjusting for inflation. It reflects the value of output at the prices prevailing in the time period being measured.
Nominal GNI
The total income earned by a country’s residents (regardless of where their factors of production are located) in a given time period, usually a year, measured at current market prices, without adjusting for inflation. It includes factor income earned abroad by residents and excludes factor income paid to foreign residents in the domestic economy.
what’s the difference between nominal and real in economics?
Nominal refers to values measured at current prices, not adjusted for inflation or changes in the price level.
Real refers to values that are adjusted for inflation and measured using constant prices to reflect true changes in economic activity, excluding price changes.
nominal interest rates
Interest rates that are expressed without adjusting for inflation, representing the stated rate charged for borrowing or earned on savings in current terms, not reflecting changes in purchasing power.
purchasing power
Purchasing power refers to the value of a country’s currency in terms of the quantity of goods and services that can be bought with it. It is a measure of how much a unit of currency (such as a dollar or euro) can buy in an economy.
When purchasing power increases (due to deflation), people can afford more goods and services with the same amount of money, and when it decreases (due to inflation), they can afford less.
price deflator
The price deflator is a price index that removes the impact of price changes (inflation) to allow for a comparison of economic variables over time in real terms. It is used to convert nominal values into real values by adjusting for changes in the price level.
CPI
The Consumer Price Index (CPI) is an average of the prices of a basket of goods and services that the typical consumer buys, expressed as an index number. It is used to measure the cost of living in a country and to calculate inflation by comparing the price of the basket over time.
inflation
Inflation is a sustained increase in the average level of prices of goods and services in an economy over a period of time, typically measured annually. It leads to a decrease in the purchasing power of money.
& equation
inflation rate
The inflation rate is the percentage change in the average price level of goods and services over a specific period of time, typically measured annually using the Consumer Price Index (CPI).
Inflation rate = percentage change in CPI
(n/f) average price levels
Average price levels refer to the overall price of goods and services in an economy, typically calculated by aggregating the prices of a selected basket of goods and services. This basket represents the typical consumption pattern of households within the economy, and it is used to assess inflation and the cost of living over time.
PPP
Purchasing Power Parity (PPP) is a method used to compare the buying power of different currencies by adjusting them to be equal to the buying power of US$1. PPP exchange rates are used to compare income or output variables across countries, eliminating the influence of differences in price levels.
3 methods to measure national output
Income Method
Expenditure Method
Output Method
Note that when measuring the national output or income by simply adding up the output figures of all the firms in a country, it would be important to avoid ‘double counting’. The outputs of some firms are the inputs of other firms. This is why either only the values of final goods or the values added at each stage of production are totalled.
How do income, output, and expenditure relate to each other in an economy?
When an economy is in equilibrium, total income must always equal total output which must always equal total expenditure. All the income earned is spent buying goods and services which need to be produced.
national income (income method for measuring national output)
Sum of wages, interest, profit and rent (sum represents the rewards for the factors of production) paid to the residents of a country, transfer payments are not included.
national expenditure (expenditure method for measuring national output)
Sum of spending on domestically produced goods and services in an economy measured over a certain period of time (typically broken down into C,I, G, X-M).
national output (ouput method for measuring national output)
Total value of all final goods and services
produced in an economy over a certain period of time.
domestic
Refers to activities within the borders of a country.
Focuses on production, consumption, and income generation that occurs within the country’s boundaries, regardless of the ownership of the factors of production.
Example:
Gross Domestic Product (GDP) measures the total value of all goods and services produced within a country’s borders over a specific period of time (even if the production is done by foreign-owned companies within the country).
