3.1. The Level of Overall Economic Activity

What are the six macroeconomic objectives?

1. Steady economic growth.

2. Low unemployment.

3. Low and stable inflation.

4. Sustainable government debt.

5. Equitable distribution of income.

6. Favourable trade balance.

Factors of Production

All resources used in the production process: land, labour, capital and entrepreneurship.

Land

All natural resources used for production.

Labour

All human resources used for production.

Capital

All man-made resources used for production.

Entrepreneurship

The owner who brings the factors of production together and organises them to produce new products.

Circular Flow of Income Model

A model of an economy that shows how income flows between households and firms in a product and factor market.

Leakages

Income received by households that is not spent on domestic goods and services: it is leaked from the circular flow. Savings, Tax and Imports.

Injections

Income earned by firms that does not come from domestic household spending: it enters the circular flow. Investment, Government Spending and Exports.

Income Method

Measuring national income by adding the total income earned by all factors of production within the domestic economy. Wages + Rent + Interest + Profit.

Output Method

Measuring national income by adding value added at all stages of the production process of goods and services.

Expenditure Method

Measuring national income by adding the total expenditure on all goods and services produced in the domestic economy. C + I + G + (X-M)

Gross Domestic Product (GDP)

The total value of all goods and services produced within an economy in a given time period.

Gross National Income (GNI)

The total income earned by a country's factors of production, regardless of where they are located, in a given time period.

Net Factor Income

Income earned by domestic factors of production in foreign economies, subtract income earned by foreign factors of production in the domestic economy.

Real GDP

GDP adjusted for inflation.

How to calculate Real GDP, using a "GDP deflator"

Real GDP = (Nominal GDP/Deflator) x 100

GDP per capita

GDP per person (divided by the population)