IB Economics - 3.1

National income

Measures economic activity within a country and provides insights into how it's performing

GDP

The total market value of all final goods and services produced annually in an economy

Circular flow of income

Injections > withdrawals = Economic Growth

Withdrawals > Injections = Economic decline

Injections in circular flow of income

Government Spending

Investment

Export

Leakages in circular flow of income

Saving

Taxation

Import Purchases

Approaches to calculating national income

Expenditure Approach: C + I + G + (X-M)

Income Approach (FoP rewards): W + R + I + P

Output Approach: The value of all finished goods/services within the economy each year

GNI (Gross National Income)

Nominal GDP + Net income earned from abroad

Used to calculate income earned by multi-national corporations and remittances.

Real GDP and GNI

Adjusted for inflation

Real GDP = (Nominal GDP / GDP Deflator) x 100

Real GNI = Real GDP + Net income from abroad

Real GDP/GNI per capita

Real GDP per capita = Real GDP / Population

Real GNI Per capita = Real GNI / Population

Purchasing Power Parity

Calculates the purchasing power of different currencies to make more accurate standard of living comparisons between countries where goods and services cost different amounts.

Business Cycle

Shows changes in real GDP over time

Positive output gap = growth in real GDP above the trend

Negative output gap = in real GDP below the trend

Boom

High economic growth

Decreasing unemployment

Creation of positive output gap

High confidence

Demand-pull inflation

Improvement in govt. budget

Recession

Two or more consecutive quarters of negative economic growth

Increasing unemployment

Increasing negative output gap and spare production capacity

Low confidence

Low inflation

Increase in govt. expenditure

Using national income statistics to measure well-being

Useful for making comparisons:

- In effectiveness of policies

- In standards of living

- over different time periods

Limitations of GDP date for making comparisons

Do not include non-marketed output

Do not include output sold in underground markets

Lack of information about quality of goods/services

Environmental factors like negative externalities and depletion of natural resources are ignored

No distinctions about the composition of output

Do not take into account quality of life factors and education/healthcare/life expectancy

Lack of information about inequality and distribution of income

Alternative measures of well-being

OECD better life index

Happiness index

Happy Planet index

OECD Better Life Index variables

Housing, income, jobs, community, education, environment, civic engagement (voter turnout, community involvement in legislation), health, life satisfaction, safety, work-life balance

Happy planet index variables

(Wellbeing x Life Expectancy) / Ecological Footprint

Happiness Index variables

Psychological well-being

Health

Time Balance

Community

Social Support

Education, arts, culture

Environment

Governance, Material Well-being (financial security), work.