13 - Level of overall economic activity

What is commonly used to measure national income

Gross domestic product - GDP

Output method - National income

• measures the value of the goods and services produced

• Summing all of the value added by all the firms

  • at each stage of production process, deduct cost of input, in order to not double count

• Data usually grouped in different sectors

Income method

measuring national income

• value of all the incomes earned in the economy

Expenditure method

measuring national income

• Value of all spending on goods and services in the economy

  • include:

  • Household spending, consumption

  • spending by firms, investment

  • government spending

  • spending by foreigners on exports minus import spending, net exports

What is GDP

Total value of all final goods and services produced in an economy in a year

GDP components

C + I + G+ (X-M)

What is national income equal to

National output=national expenditure

GDP

Total economic activity in a country regardless of who owns the productive assets

e.g. if an (MNC) is operating in canada, counted in canadas GDP - not indian

GNI

Total income that is earned by a countrys FOP’s regardless of where assets are located

• indian MNC would be counted in Indias GNI

GNI Equal to

• = GDP + Income from assets - income paid to foreign assets abroad

• = GDP + Net property income from abroad

Income earned by assets abroad:

Property income from abroad

Difference between income earned from assets abroad minus income paid to foreign assets operating domestically

Net property income from abroad

What must you consider when comparing GDP from one year to another

Must consider that the priced likely rose

• overstate value of GDP

• That is, GDP will rise even if there hasn’t actually been increase in economic activity

How to get GDP at constant prices

take the nominal GDP and adjust for inflation to get GDP at constant prices

• done through GDP deflator - value known as real

real GDP =

Nominal GDP adjusted for inflation

Real GNI =

Nominal GNI adjusted for inflation

GDP per capita

Total GDP / Size of population

GNI per capita

Total GNI / Size of population

Why are national income stats gathered

• can be seen as a “report card“. Measure growth

• Government use to develop policies

• models of the economy and forecast future

• performance of economy over time

• living standards

• comparing countries

Limitations of NI stats

• inaccuracies

• unrecorded or under-recorded economic activity - informal markets

  • Not everything is recorded, e.g. work from home

  • E.g. underdeveloped countries, farmers may grow thier own food, GDP undervalued

  • Illegal markets

    • foreign workers without permits

    • avoid taxes, e.g. cigs

    • understate full income, avoid tax

• external costs

  • Doesn’t account resource delpetion

  • Cutting down trees can increase GDP, no accounting for the loss

• quality of life concerns

  • may grow, longer hours, less holidays

  • volunteer work not counted, discouraged in economic growth

• composition of output

  • Don’t benefit consumers (Capital/Defence goods)

    • hard to argue that increase GDP = Increase living standard

What is the business cycle

• periods of rising and slowing growth

• periodic fluctuations in economic activity measured by changes in real GDP

Labeled business cycle

Recovery: Business cycle

GDP increasing due to AD increasing, houses and business spend more

To meet this AD, firms increase output and unemployment falls

Economy in boom

Economic policy makers, likely to react and try to slow growth, decrease AD - start of recession

Recession

Two consecutive quarters of negative GDP growth, falling GDP. Unemployment increases, low AD, lower rates of inflation, deflation

What will contraction do eventually

Come to an end, known as trough.

Output cannot fall forever.

Low demand for money for investments will result in low interest rates. AD will increase, enter recovery

Positive VS negative output gap

• long term represents the growth which an economy can sustain over time

• difference between lines = output gap

• A = negative output gap - economy producing below, unemployment

• B = positive output gap - economy producing beyond capacity, inflation

OECD better life index

• mission to promote policies that will improve social and economic well being

• comparison of well being across countries

• 11 topics

11 topics OECD

Material living (Housing income, jobs)

Quality of life (Community, education, environment, governance, health, life satisfaction, safety, work - life balance)

Happiness index

• main consideration: GDP per capita, social support, healthy life expectancy, freedom to make choices, generosity, perception of corruption

Happy planet index

Well being x Life expetancy x Inequality of income // ecological footprint (Global hectares pp)