Economics - Measuring economic activity

Nominal GDP

Gross domestic product, sum value of all final goods and services produced within a country’s boundaries in one year.

Injections

add money and increase size of circular flow model:

increased government spending, increased investments, increased exports

leakages

remove money and reduce size:

increased savings, increased taxation, increased import

circular flow model

G = government spending, T = taxation

I = investment, S = savings

X = exports, M = Imports

economic growth vs decline

if injections are bigger than leakages: economic growth

economic growth definition

Increase in the value of output, adjusted for inflation/ increase in real GDP

Calculating national income

1. expenditure approach

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

2. Income approach

   National income = wages from labour W + rent from land R + interest from capital I + profit from entrepreneurship P

3. Output approach

   Adds up value of all finished good and services produced within the country each year

definition of letters

consumption= total spending of goods/ services by consumers

Investment =total spending on capital goods by firms

Govt spending = total spending of government in economy (public sector salaries, provision of merit/public goods)

Net exports = difference between revenue gained and expenditure abroad

GNI

nominal GDP + net factor income earned abroad

Real gdp/gni

value of all goods and services produced in an economy in a one year period, adjusted for inflation

calculating real gdp

= nominal gdp/gdp deflator x 100

calculating real gni

real gdp + net income earned abroad

PPP

Purchasing power parity is a conversion factor which calculates the relative purchasing power of different currencies.

• Shows number of units of a country’s currency that are required to buy a product in the local economy, as 1 dollar would in USA

• eg. if good costs 135 dollars in vietnam after converted then PPP= 1:3 so cost of living is higher in the USA

• however, if USA’s GNI/ capita is more than 3 x bigger than Vietnam, could be argued USA has higher standard of living

The business cycle

Shows changes in real GDP that occur in an economy over time as it fluctuates above and below the long- term trend rate

Positive vs negative output gap

Positive output gap = growth of real gdp above trend

Negative output gap = Growth of real gdp below trend

characteristics of a recession

2 or more consecutive quarters of negative economic growth, higher unemployment, higher negative output gap (spare production capacity), low confidence, low inflation, low government spending

characteristics of a boom

increased rates of economic growth, decreasing unemployment, reduced negative output gap, high confidence and risky decisions, increasing rate of inflation, improvement in government spending

Limitations of using GDP data to compare living standards between countries and over time

• lack of information provided (distribution of income not provided)

• quality of goods and services (provides no information on increase/decrease of quality over time)

• Does not include unpaid/ voluntary work (for example, some countries have high family child care provision which increases standards of living)

• Does not show differences in hours worked

• Doesn’t show environmental and health impacts

• Doesn’t show unrecorded transactions

Alternative methods

1. oecd better life index

2. happiness index

3. happy planet indey

oecd

organisation for economic and cultural developments better life index aims to measure well-being of citizens using 11 variables:

housing, income, jobs, community, education, environment, civil engagement, health, life satisfaction, safety, work-life balance

happy planet index

measures sustainable well being. Countries are ranked by how efficiently they develop long happy lives using earths scarce resources sustainably.

= (well being x life expectancy)/ ecological footprint

Happiness index

Measures happiness in 10 areas:

psychological well being, health, time balance, community, social support, education/arts/culture, environment, governance, material well being, work