macro 3.1 measuring econ activities

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GDP full term and definition

Gross domestic product. It is the market value of all final goods and services produced in a country over a period of time

How do we measure economic activity? Explain definition of each of them

1. Expenditure approach - Adds up all spending of final goods and services produced wihtin a country over a period of time

2. income approach - Adds up all income earned by the factors of production in a country over a period of time.

3. output approach - adds up all value of final goods and services produced within a country over a period of time

GDP equation or AD equation

GDP=C+I+G+(NX) → NX is export(X) - import(N)

state the difference between nominal and real GDP

• Nominal(measured at current prices, counts IN INFLATION) vs REAL GDP(meaursed at constant price (base year, hence doesn’t count in inflation))

• Nominal: ir price level increase = nominal GDP increase, even though there are no real increase in economic activity (maybe cuz inflation → causing price increase → caring nominal GDP to go up but the real GDP remains the same)

• Real: adjusts nominal GDP for the changes in prices, measures the actual changes in economic activity (hence able to determine whether if there is actual increase/decrease in the real output of country without letting inflation(price change) affect it)

What's the difference between GDP and GNI

GDP measures only WITHIN and inside of a country → residents working aborad/in foreign countries are not counted, it doesnt take account into who owns the resources (ownership of factors of production) → you could be foreigner working here, but your income and spending spent in THIS country is also counted into GDP

GNI measures income earned by ownership of factors

In developing and developed countries, is GNI greater/less than GDP? Explain

• developed countries: GNI>GDP → GNI is GDP+income earned from abroad, for developed countries, they have strongger and more dominating firms and shops, i.e nike, mcdonald’s, hence they are able to expand to other developing countires → hence earning income from foreign countries which further adds MORE ino GNI → GNI>GDP

• developing countires: GNI<GDP → developing countries don’t have very strong dominating shops → less chance to expand to foreign countires → less income earned from foreign countries → not a lot foreign income added to GNI, result: GDP more than GNI

what is PPP and what is its usage?

definition: The amount of a country’s currency that is needed to buy the same quantity of local goods and services that can be bought with USD $1 in the united states

Usage: ELimnate the effect of price level differences, to make the GDP and GNI directly comparable across different countires

state advantages of using national income statistics

Advantages: able to compare between different counties, gives indication of average income

state disadvantages of using national income statistics

Disadvantages: overesitmate quality of life, inaccuracies, doesn’t count in the quality of output, won’t be able to address the income inequality between the poor and rich (disparity in income distribution)

Why is GDP important?

• GDP PER CAPITA Shows the average income within country’s population/on average how much is consumed

• Able for government to address if there is development in a country’s economy(able to indicate the size of economy)

• Income earned by a country in a year

• Growth in GDP more than population = average income per person increased

What are some limitaions of GDP?

• Unable to determine the actual quality of life

• Unable to determine whether there is high or low inequality in income distribution → unable to determine the gap between the rich and poor → only able to determine the average

• Working hours can’t be determined → workers can be overwroked or working for long hours to achieve high GDP

• Underground black markets doesn’t count into GDP → underestimation

• Understates market valiue of output → volunteering work not counteredBest combination of goods and services are produced or not cant be determined

Other alternatives to measure economic wellbeing:

• Happiness index

• Happy planet index

• OECD better life index