IB DP1 econ unit 8/9

National Income Accounting

Measurement of an economy's national income and output as wel as other measures of economic performance by specialised statistical services in every country.

National Output (Aggregate Output)

Total output produced by an economy, also known as aggregate output, often measured by real GDP.

National Income

The total income of an economy, consisting of factor payments or the sum of wages,
interest, rent plus profit, often used interchangeably with the value of aggregate output, particularly in the context of macroeconomic models (such as the AD-AS model).

Expenditure Approach

A method used to measure the
value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period (C+ I +G+(X - M)). As suggested by the circular flow model, it is equivalent to measurement yb the output approach and the income approach.

Income Approach

A method used to measure the
value of aggregate output of an economy, which adds up al income earned by the factors of production ni the course of producing al goods and services within a country in a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the output approach.

Output Approach

Amethod used to measure the
value of aggregate output of an economy, which calculates the value of al final goods and services produced in the country within a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the income approach.

Consumption

Spending by households (consumers) on goods and services (excludes spending on housing).

Investment

Includes spending by firms or the government on capital goods (i.e. buildings, machinery, equipment, etc.) and all spending on new construction (housing and other buildings).

Government Spending

refers to spending by governments within a country (national, regional, local). It includes purchases by the government of factors of production, including labour services. It includes government investment, referred to as 'public investment', which usually involves roads, airports, power generators, buildings.

Net Exports

Refers to the value of exports minus the value of imports.

Gross Domestic Product (GDP)

A measure of the
value of aggregate output of an economy, ti si the market value of all final goods and services produced within a country during a given time period (usually a year); may be contrasted with gross national income (GNI).

Gross National Income (GNI)

A measure of the total
income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country's residents regardless of where the factors are located; GNI=GDP plus income from abroad minus income sent abroad. May be contrasted with gross domestic product (GDP).

Nominal Value

Value that is in money terms, measured in terms of prices that prevail at the time of measurement, and that does not account for changes ni the price level; to be distinguished from real values.

Real Value

Value that has eliminated the influence of changes in the price level.

Nominal GDP

Gross domestic product measured in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GDP.

Nominal GNI

Gross product national income in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GNI

Real GDP

Gross domestic product (GDP) measured in constant prices, i.e. prices that prevail in one particular year, called a 'base year'; this is useful for making comparisons of changes in GDP over time that have taken into account the influence of changing prices; to be distinguished from nominal GDP.

Real GNI

Gross national income (GND measured in
constant prices, i.e. prices that prevail in one particular year, called a 'base year'; this si useful for making comparisons of changes in GNI over time that have taken into account the influence of changing prices; to be distinguished from nominal GNI.

GDP per Capita

Gross domestic product divided by the number of people ni the population; is an indicator of the amount of domestic output per person in the
population.

Per Caqpita

Per person, or per head. For example, GDP per capita si total GDP divided by the number of people in the population.

Purchasing Power Parity (PPP)

Special exchange rates between currencies that makes the buying power of each currency equal to the buying
power of USS1, and therefore equal to each other. The use of PPP exchange rates to convert GDP (or GNI or any other output or income variable) eliminates the influence of price level differences across countries and is very important for making cross-country

Price Deflator

A price index used to convert nominal values into real values, such as nominal GDP into real GDP, known as the 'GDP deflator'

Business Cycles

Fluctuations in the growth of real output, or real GDP, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output).

Short Term Fluctuations

Alternating periods of expansion (increasing real output) and contraction
(decreasing real output), which occur in the business cycle.

Recession

An economic contraction, where there is falling real GDP (negative growth) and increasing
unemployment of resources which last six months or more.

Long-Term Growth Trend

In the business cycle diagram,
refers to the line that runs through the business cycle curve, representing average growth over long periods of time; shows how output grows over time when cyclical fluctuations are ironed out. The output represented
by the long-term growth trend is known as potential output.

Potential Output (Potential GDP)

The level of output
(real GDP) that can be produced when there si 'full employment', meaning that unemployment is equal to
the natural rate of unemployment; also known as the full employment level of output.

Full Employment

i) In the production possibilities model, refers to maximum use of al resources in the
economy to produce the maximum quantity of goods and services that the economy si capable of producing (production possibilities), implying zero unemployment. (ii) In the AD-AS model, refers to the natural rate
of unemployment, or unemployment of labour that prevails when the economy si producing potential output, or real GDP, determined by the position of the LRAS curve (when the economy is in long equilibrium).

Natural Rate of Unemployment (NRU)

Unemployment that
occurs when the economy is producing at its potential
or full employment level of output (real GDP), and si equal to the sum of structural, frictional plus seasonal unemployment.

National Income Statistics

Statistical data used to measure national income and output and other measures of economic performance.

OECD Better Life Index

An alternative measure to
standard national income accounting that measures
economic well-being in a number of dimensions that take into account quality of life.

Happiness Index

An alternative method to standard national income accounting that measures economic well-being using numerous quality of life dimensions in addition to real GDP per capita.

Happy Planet Index (HPI)

An alternative method to standard national income accounting that takes into account environmental sustainability and inequalities. It si a measure of sustainable well-being based on four
dimensions, life expectancy, wel-being, inequality of outcomes, ecological footprint.

(life expectancy x well-being x inequality of outcomes)/(ecological footprint) = HPI

Aggregate Demand

The total quantity of goods and services that al buyers in an economy (consumers, firms, the government and foreigners) want to buy over a particular time period, at different possible price levels, ceteris paribus.

Aggregate Demand Curve

A curve used in macroeconomics showing the relationship between
the total amount of real output demanded by the four components (consumers, firms, government, foreigners) and the economy's price level over a particular time period, ceteris paribus.

Determinants of Aggregate Demand

Factors that cause
shifts of the aggregate demand curve; include factors that influence consumption spending (C), investment spending (1), government spending (G) and net exports (X - M.)

Consumer Confidence

A measure of the degree of optimism of consumers about their future income and
the future of the economy; ti si measured on the basis of surveys of consumers. Is an important determinant of the consumption component of aggregate demand.

Wealth

The money or things of value that people own minus debts to banks or other financial institutions.
May include savings deposits (money saved ni a bank); stocks in the stock market; bonds; land, houses and
other property; valuable paintings or jewellery.

Income Taxes

taxes paid by households on their incomes

household indebtness

the degree to which households have debts.

business confidence

a measure of the degree of a optimism among firms in an economy about the future performance of firms and the economy; it is measured on the basis of surveys of business managers. Is an important determinant of the investment compenent of aggregate demand

corporate indebtness

the degree to which corporations have debts.

aggregate supply

the total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus

short run aggregate supply curve (SRAS)

a curve showing the relationship between real GDP produced and the economy’s price level when wages (and other resource prices) are held constant, ceteris paribus; the SRAS curve is upward sloping.

equilibirum level of output

the level of output (real GDP) where the aggregate demand curve intersects the aggregate suppy curve (also knowns as the ‘equilibirum level of income’). Note the distinction between short run equilibrim level of output and long run equilibrium level of output.

short run equliibrium

given by the point of intersection of the AD and SRAS curves, and determines the price level, the level of rGDP, and the level of employment.

Monetarist/New classical model

actually includes two different models of the macroeconomy *the monetarist and the new classical); both are based on the following principles: the importance of the price mechanism in co-ordination economic activities, the concept of competitive market equilibrium, and thinking about the economy as a harmaronious system that automatically tends toward full employment.

long run aggregate suppy (LRAS) curve

a curve showing the relationship betwen real GDP produced and the price level when wages (and other resource prices) change to reflect changes in the price level, ceteris paribus. The LRAS curve is vertical at the full employment level of GDP, indicating that in the long run output is independent of the price level

long run aggregate suppy (LRAS)

the total quantity of goods and services (real output or real GDP) produced in an economy in the long run(when wages and other resource prices change to reflect changes in he price level), ceteris paribus

long run equilibrium

when the AD curve and the SRAS cruve intersect at any point on the LRAS curve.

deflationary/recessionary gap

a situation where real GDP is less than potential GDP, and unemployment is greater than the natural rate of unemployment, it arises when the AD curve intersects the SRAS curve at a lower level of real GDP that potential GDP. Also known as”deflationary gap"

inflationary gap

a situation where real GDP is greater than potential GDP, and unemployment is lower than the natural rate of unemploymet; it arises when the AD curve intersects the SRAS curve at a higher level of real GDP than potential GDP.

full employment level of output

the level of output (or real GDP) at which unemployment is equal to the natural rate of unemployment; the level of output (real GDP) where there is no deflationary or recessionary gap. Also known as potential output (potential GDP)

Keynesian Aggregate supply curve

an aggregate supply curve that has. aflat (horizontal ) section, an upward sloping section, and a vertical section. It shows the relationship between real GDP and the price level of the assumption that prices and wages are inflexible downward. Changes in the price level and/or real GDP depend on the level of aggregate demand and where the economy is producting relative to full capacity output.

peak

a peak represents the cycle’s maximum real GDP, and marks the end of the expansion. When the economy reaches a peak, unemployment of resources has fallen substantially, and the general price level may be rising quite rapidly; the economy is likely to be experiencing inflation

contraction

following the peak, the economy begins to experience falling real GDP (negative growth), shown by the downward sloping parts of the curve. If the contraction lasts six months (two quarters) or more, it is termed as a recssion, characterised by falling real GDP and growing unemployment of resources. Increases in the price level may slow down a lot, and it is even possible that prices in some sectors may begin to fall.

trough

a trough represents the cycle’s minimum level of GDP, or the end of the contraction. There may now be widespread unemployment. a trough is followed by a new period of expansion (also known as a recocvery), marking the beginning of a new cycle.

changes in consumer confidence

consumer confidence is a measure of how optimistic consumers are about their future income and the future of the economy. governments around the world regularly measure consumer confidence (through surveys based on questionnaires of consumers) to try to predict the level of consumer spending (consumption).

changes in interest rates (C)

some consumer spending is financed by borrowing, and so is influenced by interest rates changes. INterest rates can change as a result of a type of policy called ‘monetary policy’ (Consumption).

Changes in Wealth

Wealth is the valye of assets that people own, such as savings in thei bank accounts, houses, stocks and bonds, jewellery, works of art, and so on; minus debt to banks or other financial

changes in income taxes

if the governemnt incrases income taxes (taxes paid ny households on their incomes), then consumer disposable income, which is the income left over after personal income taxes have been paid, falls; changes in taxes are the result of a type of government policy called ‘fiscal policy’ (consumption)

Changes in the level of household indebtness

indebtedness’ refers to how much money people owe from borrowing in the past (consumption)

Expectations of future price levels

consumer spending may be influenced by what they expect prices to be in the future (consumption)

changes in business confidence

business confidence refers to how optimistic firms are about their future sales and economic activity (investment).

Changes in interest rates (I)

increases in interest rates raise the cost of borrowing, and force businesses to reduce investment spending financed by borrowing, (investment).

Changes (improvements) in technology

improvements in technology stimulate investment spending (investment)

changes in business taxes

business taxes in this context refer to taxes on profits (also known as corporate income taxes), (investment)

corporate indebtedness

as in the case of household indebtedness, if buisnesses have high levels of debt due to past borrowing, they will be less willing to make investments (investment)businesses

legal/institutional changes

sometimes, the legal and institutional enviornment in which businesses operate has an impact on investment spending. This is often the case in many developing economies where laws and institutions do not favor small businesses (Investment)

changes in economic priorities

the government can use its own spending as part of a deliberate attempt to influence aggregate demand (gov spending)

changes in political priorities

government have many expenditures, arising from provision of merit goods and public goods, spending on subsidies and pensions, payments of wages and salaries to its employees, purchases of goods for its own use, and so on. It may decide to increase or decrease its expenditures in response to changes in its priorities (gov spending).

changes in national income abroad

consider aggregate demand in country A, which has trade links with country B. If country B’s national income increases, it will import more goods and services from country A so that country A’s exports will increase (net exports)

Changes in exchange rates

an exchange rate is the price of one country’s currency in terms of another country’s currency. COnsider again country A and assume that the price of its currency increases, becoming more expensive relative to the currency of country B. Now country B finds Country A’s output more expensive, and so it imports less from country A. (net exports).

changes in trade policies

‘trade protection’ refers to restrictions to free international trade often imposed by governments. Suppose country A trades freely with country B (with no trade restrictions). However, country B’s government decides to impose restrictions on imports fromm country A. Country A’s exports will fall.

changes in wages (SRAS)

if wages increase, with the price level constant, firms’ cost of production rise (SRAS)

changes in non labor resource prices (SRAS)

changes in the price of non-labour resource, such as the price of oil, equipment, capital goods, land inputs, and so on affect the SRAS curve in the same way as changes in wages (SRAS)

changes in indirect taxes (SRAS)

indirect taxes were studied in Chapter 4/5. They are treated by firms like costs of production. Therefore, higher indirect taxes are like increases in production costs.

changes in subsidies (SRAS)

subsidies have the opposite effect of taxes, as they involve money transferred from the government to firms (SRAS)

supply shocks (SRAS)

supply shocks are events that have a sudden and strong impact on short run aggregate supply. For example a war or violent conflict can result in destrcution of physical capital and disruption of the economy, leading to lower output produced (SRAS).

Increase in quantities of FOP (LRAS)

an increase in the quantity of physical capital, or the quantity of land (such as when there is a discovery of new oil reserves) means that the economy is capable of producing more real GDP (LRAS)

imporvements in technology (LRAS)

workers who work with imporved machines and equipment that have been produced as a result of technological innovations will be able to produce more output in the same amount of time (LRAS)

increase in efficiency (LRAS)

when an economy increases its efficiency in production, it makes better use of its scarce resources, and can as a resut produce greate quantity of output. (LRAS)

insitutional changes (LRAS)

This point si related to efficiency in resource use because changes in institutions can sometimes have important effects on how efficiently scarce resources are used, and therefore on the quantity of output produced. For example, the degree of private ownership as opposed to public ownership of resources, the degree of competition in the economy, the degree and quality of government regulation of private sector activities, and the amount of bureaucracy can each affect the quantity of
output produced (LRAS)

Reductions in the natural rate of unemployment (NRU) (LRAS)

The natural rate of unemployment is the unemployment that is 'normal' or 'natural' for an economy when it
si producing its 'full employment' level of output. It includes unemployed people who are in between jobs, who are retraining in order to become more employable, and others. The natural rate of unemployment differs from country to country and it can change over time. If it decreases, the economy is making better use of its resources, and can therefore produce a larger quantity of output. (LRAS)