Unit 3: Topic 13: Measuring economic activity and illustrating its variations

13.1 - 13. 4

Key terms for Macroeconomics

Change & Economic well-being

What is macroeconomics the study of?

national economic activity

What does macroeconomics measure?

Total well-being

State the 4 macroeconomic objectives or concerns.

• Full employment

• Economic growth

• Price stability

• Income distribution

FEPI
내가 달성 해야하는 objectives를 FEPI (회피)한다.

State what is full employment measured by

low unemployment rate

State what economic growth is measured by

increase in national income

State what is price stability is measured by

low inflation rate

State what income distribution is measured by

more equitable distribution of income

State the main statement/ equation that guides economics when they measure national income.

expenditure = income

State the 3 methods in counting national income.

• Spending (expenditure) approach

• income approach

• output approach

State what the circular flow model of the economy shows?

movement of resources and money through the economy

State the three sectors involved in the circular flow model of the economy

• trade

• banking

• government

State the two economic agents involved in the circular flow model.

• households

• firms

State the two markets involved in the circular flow model.

• factor market

• product market

State what the factor market provides.

the 4 factors of production

• labor

• land

• capital

• entrepreneurship

Explain why output = value of income

According to the circular flow model, expenditure on outputs (products) leads to income for firms, and the factors of production

Define capital

One of the factors of production; used to further produce goods and services; types: physical, human, financial, natural

Define net exports

Deduction of outflow of money from imports (M) from the inflow of money from exports (X); Export (X) - Import (M)

Expenditure approach equation

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

Define gross domestic product (GDP)

measurement of total production of final goods and services in a country in a given period (usually one year)

Define final goods and services

Goods and services ready for consumption for consumers to satisfy their wants or needs; NOT consumed for the production of other goods and services

Define expenditure approach

A method used to measure a country’s aggregate (total) output through the total spending/ expenditure on all final goods and services produced within a given time.

Define income approach.

A method of measuring a country’s aggregate (total) output through the total income from all the factors of production and final goods and services (wage, interest, rent, profit) within a given time.

Income approach equation

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

Define output approach.

A method to measure a country’s aggregate (total) output by adding up the values of goods and services produced, keeping in mind to NOT DOUBLE COUNT by only adding up the additional value used to make each good.

Ex.
Bread price = wheat price + milk price + labor price

The additional value would only be the labor price since wheat price and milk price are separate goods.
We only count the additional value so we don’t overestimate a market’s output.

Overall calculation for economic activity of a country:

GDP = national output = national income = national spending

Explain why GDP is the measurement of income geographically

All outputs domestically produced, regardless of the nationality of who owns the factor of production are measured

ex.
UK-owned factories or firms in Ireland will account for Ireland’s GDP
Irish factories of firms in the UK will account for UK’s GDP

Define gross national income (GNI).

Total money value of all final goods owned by the country produced in the country’s economy PLUS total money value of all final goods belonging to the country produced abroad (net property income from abroad).

ex:

UK GNI = value of goods produced by UK-owned firms in the UK + value of goods produced by UK-owned firms in Ireland - value of goods produced by Irish-owned firms

Equation for GNI measurement

GNI = GDP + net property income from abroad

Describe the implications of GNI>GDP

greater income from abroad

Describe the implications of GNI.

The total income available to a country’s residences; impacts standards of living and economic well-being

Describe the implications of GDP>GNI

greater foreign presence in a country; greater outflow of income

Describe the implication of GDP.

Shows the economic activity within a country’s border; shows the total levels of production and consumption.

Define nominal GDP

measurement of aggregate output at current values

Define real GDP

measurement of aggregate output with adjustments based on inflation levels

Explain why real GDP is a more accurate representation of output measurement than nominal GDP.

changes in price (due to inflation or deflation) can distort the measurement of actual output

State what high nominal GDP/ GNI values signify.

Inflation

State what lower nominal GDP/ GNI values signify.

Deflation

State the goal of real GDP.

showcasing the value of output at constant prices

State the relationship between nominal GDP and rise in price levels (inflation)

nominal GDP exaggerates value of output compared to real GDP

State the relationship between nominal GDP and falls in price levels (deflation)

nominal GDP underestimates value of output compared to real GDP

Define nominal GNI

measure of aggregate output + net property income from abroad at current values

Define real GNI

measure of aggregate output + net property income from abroad at adjustments for inflation levels.

Define intermediate goods

Goods used for production of other goods

Define real GDP/ GNI per capita

value of goods and services produced per person with adjustments for inflation.

GDP/ GNI per capita equation

GDP/ GNI divided by population size

Define real GDP/ GNI per capita which uses purchasing power parity (PPP)

measures GDP adjusting to the standard cost of goods in a country relative to other countries; takes into account the cost of living; reflects the standard of living of citizens.

State what the real GDP/ GNI PPP does to currencies across different countries.

equalizes the purchasing power of different currencies by eliminating differences in price levels between countries

State two ways how national income statistics can be used to measure economic well-being.

• help compare the relative standard of living across countries

• help with evaluating the economic performance over time

  • creation of policies, deciding between governing appraoches, predicting the market

Define welfare

well-being of a population; good quality of life

State how national income statistics underestimate economic well-being.

• increasing life span

• black market and parallel market activity not accounted for

• unpaid output not accounted for

• rising quality and falling prices

(Can use for CONS of GDP/ GNI)

State how national income statistics overestimate economic well-being.

• negative externalities

• under-reporting the loss of natural resources

(Use for stating CONS)

State the information about economic well-being national income statistics fail to give.

• quality of life

• distribution of income

(Use for stating CONS)

State the alternative measures of overall economic well-being

• Better Life Index

• Happiness Index

• Happy Planet Index

Describe the OECD Better Life Index

Usage of 11 topics concerning material living conditions and quality of life that affect wellbeing.

Describe the Happiness Index

Ranking of countries based on their happiness levels.

Main variables consist of:

• GDP per capita,

• social support,

• healthy life expectancy,

• etc.

Happy Planet Index

Measures sustainable wellbeing through a combination of four elements:

• wellbeing (satisfaction),

• life expectancy,

• inequality of outcomes

• ecological footprint.

Define the business cycle

natural rise and fall of economic growth that occurs over time

Define a business cycle’s expansion

Increase in:

• GDP

• employment

• prices

• economic activities

  • investments

  • consumption

Define a business cycle’s contraction

Decrease in:

• GDP

• employment

• prices

• economic activities

  • investments

  • consumption

Define a business cycle’s recovery

when the economy returns to its state before the contraction after a contraction

Define a business cycle’s recessionary trough

• lower point in the cycle

• economic activity is at its weakest

• only known after the economy begins to recover

Define a business cycle’s Recession

period of economic decline; lasts at least six months (2 quarters); decline in real GDP

Define peak in the business cycle

• highest point before contraction

• only known when the downturn of the curve begins

General trend of a business cycle

Upwards

Describe when economic happens

Increase in GDP from one year to the next GIVEN THAT the growth exceeds or is similar to population growth

State the role of government in the business cycle

“smoothing out the curve”; uses policies such as monetary or fiscal policies to reduce the extremes (recessions and peaks) to keep the economy stable

Describe Karl Marx’s Crisis Theory

the cyclical nature of capitalism (business cycle) would lead to class struggles

Describe John Maynard’s description of the business cycle as the boom and bust

more government intervention is needed to stabilize the economy