3.1 - GDP, national income and business cycle

national income

accounts for the total earnings from production, including wages, rents, and profits

gross domestic product GDP

market value of all final goods and services produced within a country over a time period

nominal GDP

measures a country's economic output - the market value of all final goods and services - produced within a country in a given period,

NOT YET ADJUSTED IN INFLATION

circular flow of income

a model that illustrates how money moves through an economy, showing the interactions between households and firms in the production and consumption of goods and services.

expenditure approach to calculating nominal GDP

adding up total spending on the nation's final goods and services during a specified period.

nGDP = C + I + G + (X-M)

income approach to calculating nominal GDP

adding all incomes earned by factors of production in a nation

nGDP = wages + rents + interest from capital + profit

output approach in calculation nominal GDP

nGDP (measurement the total value of goods and services produced in a country during a specific period)

gross national income GNI

the total income earned by a country's people and businesses, even if it was earned outside the country

nominal vs real values

nominal → not yet adjusted

real → adjusted to inflation

total vs per capita values

total → the whole value

per capita → value of country’s GDP/ GNI divided by its population

advantages of per capita values

• differences between population sizes while total doesn’t

• accounts for population growth

• useful as a summary measure the standard of living in a country

purchasing power parity PPP

• a conversion factor

• indicates the relative value of currencies based on the cost of ‘basket of goods’ and services, allowing for more accurate economic comparisons between nations.

purpose of PPP

• to compare economic productivity and standards of living across countries by adjusting for differences in price levels.

calculating nGDP

nGDP = C + I + G + (X-M)

calculating nGNI

nGNI = nGDP + net income from abroad

calulating rGDP

rGDP = nGDP of a year x (price level of base year)

rGDP = (nGDP/ price deflator) x 100

GDP deflator

price index used to convert nGDP to rGDP

GDP deflator = (nominal GDP / real GDP) x 100

base year value

100

business cycle

• shows the short term fluctuations in the growth in the growth of rGDP

• alternating periods of expansions and contractions

business cycle graph and assumptions

peak

• high rates of economic growth

• high inflation

• low unemployment

• high confidence in market

• positive output gap

through

• negative economic growth

• low inflation

• high unemployment

• low confidence in market

• negative output gap

national income statistics

data that measures a country's economic performance, including GDP, GNI, GNP

national income statistics purpose

• making comparisons between countries

  • wealth

  • standard of living

• provide insight into effectiveness of government policies

• insight into economic performance

limitations of using GDP data to compare living standards between countries

• lack of information provided on inequality

• provides no information on quality of goods/services

• doesn’t include unpaid/voluntary work/ black markets

  • GDP would be higher if recorded

• doesn’t consider differences in hours worked

  • doesn’t include the time taken to produce

• doesn’t account for environmental factors

  • gives no reliable comparison of actual standards of livinig

alternative measures of well-being

• OECD better life index

  • 11 variables (education, safety, housing etc.)

• happy planet index

  • measures sustainable wellbeing with 3 factors

    • (wellbeing x life expectancy)/ ecological footprint

• happiness index

  • 10 areas of personal life (health, social support etc.)