3.1 - Measuring economic activity and illustrating its variations

National income accounting

 a government bookkeeping system used to measure a nation’s level of economic activity

Expenditure approach

measures the value of total expenditure by all stakeholders in the economy, expressed as GDP = C+I+G+(X-M)

Income approach

measures the value of all factor incomes earned in the economy, expressed as GDP = interest + profits + rent + wages

Output approach

Measures the value of all final goods and services produced in the economy.

Circular flow of income

at any given time, the total expenditure from all stakeholders is equal to the total income generated by households which is equal to the total output produced by firms

Leakages

a withdrawal of money from the circular flow of income

Injections

additions to the circular flow of income

Gross domestic product

measures the value of all final goods and services produced in an economy within a given time period

Nominal Gross domestic product

measures the value of all final goods and services produced in an economy within a given time period using current price levels

Real Gross domestic product

measures of economic activity which are calculated using constant prices, meaning the values are adjusted for changes in price levels over time.

Nominal Gross national income

a measure of the incomes earned and the costs incurred in the production of GDP using current prices

Real Gross national income

a measure of the incomes earned and the costs incurred in the production of GDP using constant prices

Real GDP/GNI per capita

indicates the average income per person in the economy, providing a better indication of living standards

Real GDP/GNI per capita at purchasing power parity (PPP)

a measure of economic activity that takes into account the relative cost of living and inflation rates in different countries

Business cycle

illustrates the short-term fluctuations of real GDP over time

Expansion

occurs when real GDP increases over time

Peak

highest point of a business cycle

Recession

occurs when real GDP decreases over time

Trough

lowest point of a business cycle

potential output

the maximum level of real output that an economy can sustain over the long term when all resources are fully employed

OECD Better Life Index

an alternative measure of well-being

Happiness Index

an alternative measure of well-being

Happy Planet Index

an alternative measure of well-being