Circular flow and measures of economic performance

define the circular flow of income

the flow of goods and services between households and firms

What are three injections into the circular flow?

investment- more money into the economy
government spending- infrastructure boosts economy
exports- money from abroad

What are three withdrawals from the circular flow?

taxes- money goes to government
imports- money spent abroad
savings-represent income generated by output that that is not directly passes on through spending

Define GDP

the total output of all goods and services within a country, it also includes the output of foreign-owned businesses located in the country

What are three methods of measuring GDP?

Output, Expenditure, Income

what is the difference between nominal and real GDP?

nominal-raw value
real- adjusted for inflation

How do you calculate GDP per capita?

divide GDP by the current population

What is GNP?

Includes the value of all goods and services produced by nationals even if they are not in the country. GDP+ net investment income (dividends, interest and profit) from abroad

What are some criticisms of GDP?

It is an average so it doesn't take into account income distribution, doesn't measure informal or voluntary work and hard to estimate illegal trade, it goes up when e.g: there is a natural disaster, doesn't measure the quality of goods. It is better to use social indicators- political, environmental, health and crime.

What is GWB?

General Wellbeing-- an alternative index, tries to measure happiness

What are some criticisms of the GWB/ National Happiness

Happiness is subjective, therefore how is it measured? How can you create policies to make people happy? Evidence suggests that higher income=higher happiness, so why not aim for GDP?

Easterlin Paradox

Named after Richard Easterlin- it says that higher income= higher happiness. however in international comparisons the average level of happiness does not vary much with GDP.