Econ chapter 8

Injections

money flowing in (EX: investment, government spending, export spending)

Leakages

- money flowing out (Ex: savings, taxes, import spending)

Circular flow of income

illustrates how money, goods, and services circulate between different sectors of an economy.

National income accounting

economy’s national income or the value of output

Expenditure approach

adds up all spending on goods and services within a economy over a time period (Measures GDP)

Income approach

way of measurement that adds up all incomes earned within an economy over time (including wages, rent interest and profits)

Output approach

way of measuring that uses the sum of the total value of all final goods and services produced within an economy over a period of time

Total spending (GDP calculation)

Consumption spending (C), + Investment spending (I), + Government spending (G), + Net Exports (exports minus imports) = GDP

GDP

Gross domestic product, total monetary value of all final goods and services produced within a country in a time period

GNI

Gross national income, total domestic and foreign output claimed by a country’s residents (calculated as GDP+net income from abroad)

Nominal value

the money value or value measured in terms of prices at the time

Real value

measure of value that takes into account changes in price over time

GDP per capita

total GDP of that country divided by population (also useful as a summary measure of standard of living)

Distinction between GDP and per capita

Differing population sizes across countries, and population growth

Purchasing power parties (PPP’s)

amount of a country’s currency that is needed to buy the same quantity of local goods and services

Price index

measure of average prices in one period relative to average prices in base year

GDP deflator formula

nominal GDP/real GDP x100

Business cycle

the natural recurring fluctuations of economic activity over time, marked by alternating periods of growth and contraction

Business cycle phases

Expansion, peak, contraction, trough

Expansion (Business cycle)

occurs during positive growth in real GDP, employment of resources increases, and general price level of economy begins to rise (inflation)

Peak (Business cycle)

represents the cycle’s maximum real GDP, and marks the end of expansion, unemployment of resources has fallen substantially, and general price levels may be rising rapidly

Contractions (Business cycle)

the economy begins to experience falling real GDP (negative Growth) and growing unemployment of resources, and increases in price level may slow down. If contraction lasts 6 months or more it is a recession

Trough (Business cycle)

the cycle’s minimum level of GDP. Widespread unemployment but is followed by a new period of expansion.

Long-term growth trend (potential output)

shows how output grows over time when cyclical fluctuations are ironed out

Full employment

when unemployment is equal to the natural rate of unemployment

Natural rate of unemployment

the lowest level of unemployment an economy can sustain without causing inflationary pressure, representing a state of equilibrium in the labour market. It consists primarily of structural and frictional unemployment

GDP gap

when GDP lies above or below potential GDP (calculated by actual GDP minus potential GDP)

Why GDP and GNI don’t accurately measure the ‘true’ value of output

 do not include non-marketed outputs, don’t include underground markets, do not take into account quality improvements in goods and services, don;t account for negative externalities, don’t account depletion of natural resources, differing domestic price levels

Why GDP/GNI can’t accurately measure economic well-being

make no distinction in composition of output, cannot reflect health, education and life expectancy achievements, provide no info on distribution of income, don’t take into account leisure or quality of life

Happy Planet Index

measure of sustainable well-being and takes into consideration life expectancy, personal well-being, and are all adjusted for inequalities and ecological footprint.

Ecological footprint

impact on the environment of each individual in a society on average

National income (aggregate output)

total amount of output (allows us to assess an economy’s performance over time

3 ways to measure national income value

expenditure approach, income approach, output approach

Consumption

all purchases by households on final goods and services in a year

Investment spending

includes spending by firms on capital goods (buildings, machinery, etc.), new construction

Government spending

purchases by the government of factors of production, including labor services

Net exports

The value of exports minus imports

Alternative measures of well-being

OECD Better life index, Happiness index, Happy Planet Index

Happiness index

a metric used to measure the subjective well-being, satisfaction, and quality of life in a population, and ranks countries using surveys