unit 13 - measuring economic activity

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4 Main Macro Objectives

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32 Terms

1

4 Main Macro Objectives

  • Full employment

  • Economic Growth

  • Price Stability

  • Income distribution

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2

The Expenditure Approach

counts the total spending on final goods and services within a year

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3

Expenditure Approach formula

GDP = C+I+G+(X-M)

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4

Income Approach

counts GDP through the market view of the circular flow of income, adding up all income earned from FOP, wages, interest, rent and profits are all factor payments

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5

Income approach formula

W+I+R+P = C+I+G+(X-M)

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6

Output Approach

seeks to determine the final value of all goods and services produced within a year

identify value at each stage and then the total is then added to the national income number

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7

Output approach formula

GDP = national output = national income = national spending

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8

GDP

Gross domestic product: monetary value of all goods and services produced in a country, geographically and domestically, in a year

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9

GNI

Gross National income: the total domestic and foreign output ina country in a year

Subtracts foreign owned FOP in country and adds income in domestically owned FOP in other countries

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10

Nominal GDP

measures value of current output at current prices

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11

Real GDP

measures value of current output at constant prices, taking inflation into account

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12

What accounts for a higher GNI or GDP

  • High GDP: significant foreign presence in firms/workers

  • High GNI: significant workers/firms who send income overseas

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13

GDP formula

Consumption + Investment + Government Spending + Net exports

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14

GNI Formula

GDP + (Factor income flowing in - factor income flowing out)

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15

Real GDP Formula

(Nominal GDP/Price deflator) x 100

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16

Price deflator formula

(Nominal GDP/Real GDP) x 100

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17

What is real GDP/GNI per capita?

per head income

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18

Benefits of GDP/GNI per capita

  • gives approximate standard of living

  • shows economic growth of populaton

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19

Producing Power Parity (PPP)

buying power adjusted for local prices in difference economies, used to more accurately assess the standard of living available for a given income

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20

How can national income statistics be used to measure economic wellbeing?

  1. Comparing countries

  • comparing the standard of living across countries

  • allows us to recognize economic progress and ideas for further growth

  1. Evaluation of Economic Performance Over Time

  • Impacts policies made

  • votes can use these results to assess the effectiveness of current governing approach

  • business can use info to predict change in market demand

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21

How does GDP underestimate country’s welfare?

  • increasing life spans

  • estimated value of black market and parallel market

  • unpaid work

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22

How does GDP overestimate country’s welfare?

  • negative externalities

  • under-reporting the loss of natural resources

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23

What other information on economic wellbeing do national income statistics fail to provide?

  • composition of output: real GDP values do not communicate the types of production and their value to society

  • quality of life: trust in law, group participation, life satisfaction

  • income distribution: unaware if lower income areas are receiving fair income distribution

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24

OECD

Better life index

  • intergovernmental organization for economic cooperation and development

  • adds examination of gender disparities: level of satisfaction men and women experience at different indicators

  • desplays regions at similar rankings

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25

Happiness index

  • created by UN Sustainable Development Solutions Network

  • surveys indiviiduals based on their level of happiness

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26

Happy Planet Index

  • incorporates environmental impact

  • combines self reporting happiness and life expectancy

  • environmental impact by determining the amount of natural resources used per capita

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27

The business cycle

used to show the fluctuations of national income in a long term trend

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28

Recession - Business Cycle

two consecutive quarters of declining national output (when GDP declines over 6 months)

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29

Recessionary Trough - Business Cycle

  • lowest point of a recession

  • no one knows when this point is hit until growth has resumed

  • lowest point on GDP line

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30

Recovery - Business Cycle

  • as GDP line rises from trough

  • returning to national output value prior recession

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31

Expansion - Business Cycle

  • economy grows beyond its intial level of output

  • usually occurs in short bursts

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32

Peak - Business Cycle

  • when short bursts hit an apex

  • only observed after another recession begins

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