3.1 Measuring the Level of Economic Activity

Gross domestic product (GDP)

The total value of all final goods and services produced in an economy in a given time period (usually one year)

Gross national income (GNI)

GDP + net property income = GNI

The total monetary value of all income earned by a country's residents and businesses, regardless of whether those earnings are generated domestically or abroad

What’s not included in GDP

GDP is used to calculate the final goods produced

• The value of intermediate goods (raw materials) and components are not included

GNI per capita

GNI per head of population

• GNI / population = GNI per capita

Circular flow of income

Economic model that illustrates the flow of money between firms and households

Income method

Value of income earned by households in one year

• Wages paid to labor

• Interest paid to capital

• Rent paid to land

• Profits and dividends paid to entrepreneurs

Output method

Value of firms in different sectors of the economy

• Primary: Commodities: Agricultural goods

• Secondary: Manufacturing: Cars

• Tertiary: Services: Education

Expenditure method

Value of total expenditure of different sectors of the economy

C + I + G (X-M) = Total expenditure

• Consumption (C): Spending done by households

• Investments (I): Business spending on capital (like machinery)

• Government expenditure (G): Spending on public services

• Net exports (X-M): Exports - imports

Real GDP

GDP adjusted for inflation

• (Nominal GDP/ GDP deflator) x 100

Inflation

General increase in prices over time

Nominal GDP

GDP measured in current market prices

Economic growth

Increase in a country’s real GDP over time

• (Current year GDP - Previous year GDP)/ Previous year GDP x 100

Business cycle

The way the economic growth rate rises and falls over time

• Boom: Above trend rates of e.g.: Rise in income, inflation, fall in unemployment

• Slowdown: Growth rate falls: Fall in rise of income, unemployment potentially start to rise, less pressure to raise inflation

• Recession: Real GDP falls (period of two consecutive quarters of negative real GDP growth), household income falls, unemployment increases, inflation falls

• Recovery: Real GDP starts to increase, household income rise, unemployment falls, rise in inflation

Economic development

Improvement of the well-being of a country’s citizens over time

• Increase in household income

• Decrease in poverty

• Increase in provision of public services

Measuring e.g.: Human development index (HDI)

United Nations uses this to measure the country’s e.g.

• Life expectancy

• Education

• Real GDP per capita

Given a numerical value from 0-1, the closer to 1, the more developed a country is

Measuring e.g.: Real GNI per capita

Higher the real GNI per capita of a country, the more developed it is

• Higher average incomes

• Lower levels of poverty

• Better healthcare and education provision: Gov has more tax revenue to spend on public services

Purchase power parity (PPP)

Long term exchange rate calculated by considering the ratio of prices in one country compared to another

• Basket of goods in Country A/ Basket of goods in Country B = PPP exchange rate

Measuring e.g.: Real GNI per capita CONS

• Income distribution: GNI per capita is an average and does not account for the disparity between the richest and poorest people in society

• Nature of produced goods: Some goods produced add more welfare than others

  • Money spent on welfare (education) → produces more welfare than money spent on luxury goods (yachts)

• Non-monetary factors:

  • Crime rates

  • Political freedom

  • Leisure time

  • Climate

  • Mental health

  • Gender and racial equality

GDP deflator

Measure of inflation that compares the value of goods and services produced in an economy at current prices versus constant (base-year) prices

• Shows the change in GDP rather than the change in actual production

World happiness report

Ranks national happiness via a survey

• Resident’s happiness scale from 1 to 10

• Citizen engagement/ communications/ technology/ education/ health/ emotion/ diversity

Happy planet index

Measures the sustainable well-being of a nation’s population

• Life expectancy/ inequality of outcomes/ econological footprint

OECD Better life index

11 objectively measured criteria in a country to form an index number

• Housing/ income/ safety and security/ world-life balance/ employment/ community life/ education/ environmental factors…etc.