3.1 - Measuring economic activity

circular flow of income

A model of the economy which shows the flow of goods, services and factors and their payments around the economy.

leakages

savings, taxes, imports

injections

investment, government spending, spending on exports

3 ways to measure national income/aggregate output

expenditure approach, income approach, output approach

expenditure approach

adds up all spending to buy final goods and services produced within a country over a time period

income approach

adds up all income earned by the factors of production that produce all goods and services within a country over a time period

output approach

calculates the value of all final goods and services produced in a country over a time period

consumption (C)

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

Investment (I)

spending by firms on capital goods and spending on new construction

government spending (G)

refers to spending by governments within a country (national, regional, local)

net exports (X-M)

exports are goods and services produced within the country. imports have been produced in other countries

gross domestic produce (GDP)

the market value of all final goods and services produced in a country over a time period (usually a year)

GDP formula

C+I+G+(X-M)

national income formula

wages + rent + interest + profit

GDP vs GNI

GDP is based on location. GNI is based on ownership.

nominal GDP

measured in terms of prices at the time of measurement. does not account for changes in prices.

real GDP

takes into account changes in prices over time

total GDP

provide summary statement of the overall size of an economy

per capita GDP useful for

summary measure of standard of living in country

standard of living

the level of wealth and material comfort available to a person or community. it is a measurement of material prosperity

why is distinction between total and per capita GDP important

- differing population sizes across countries. aids in comparison

- population growth

PPP (Purchasing Power Parity)

GDP per person converted into US$ by use of exchange rates that eliminate the influence of price difference across countries; must be used to make valid comparisons across countries

GNI calculation

GDP + (income from abroad - income sent abroad)

GDP per capita formula

GDP/population

GDP deflator formula

Nominal GDP/Real GDP x 100

real GDP formula with nomimal GDP and price deflator

nominal GDP/price deflator x 100

business cycle

consist of short-term fluctuations in the growth of real output, which are alternating periods of expansion (increasing real output) and contraction (decreasing real output)

peak

represents cycle's maximum real GDP, and marks the end of the expansion. unemployment has fallen & likely inflation.

trough

represents cycle's minimum level of GDP, and marks the end of the contraction. widespread unemployment.

new period of expansion that follows a trough

recovery

contraction

falling real GDP (negative growth) - downward sloping. growing unemployment.

contraction that lasts six months (two quarters) or more

recession

expansion

positive growth in real GDP - slope upward. employment increases, price level rises more rapidly (inflation)

macroeconomics objectives using business cycle

- reducing intensity of expansions and contractions - lessens problems of inflation and unemployment

- increasing steepness of potential output - more rapid economic growth over long periods of time

why national income statistics (GDP/GNI) do not accurately measure the true value of output

do not take into account:

- non-marketed output

- output sold in underground (parallel markets)

- quality improvements in goods and services

- value of negative externalities

- depletion of natural resources

- differing domestic price levels

why national income statistics (GDP/GNI) cannot accurately measure economic well-being

do not account for:

- composition of output

- achievements in education, health, life expectancy

- distribution of income and output

- increased leisure

- quality of life factors

Types of Unemployment 

1. Frictional unemployment: time between jobs

2. Structural unemployment: mismatch of skills

3. Cyclical unemployment: caused by business cycle

Buisness Cycle Goals

• Reduce intensities of expansions and contractions

• Increase steepness of the potential output line