Measuring economic activity

national income

• measures economic activity within country

• main method of determining economic activity = measuring rate of change of output

nominal GDP

• GDP = total value of final goods produced within a country over a time period, regardless of who owns the FOP

nominal GNI

• GNI = total income received by residents of a country, regardless of where they live

• more relevant metric

• basically nominal GDP + net income earned abroad

circular flow of income

• injections add money to circular flow and increase its size

  • increased gov spending (G)

  • increased investment (I)

  • increased exports (X)

• leakages remove money and reduce its size

  • increased savings by households (S)

  • increased taxation by government (T)

  • increased import purchases (M)

• high levels of interdependence between all these components

how the flow of income is equal to the expenditure flow & value of output flow

• income flow from firms to houses = expenditure flow from houses to firm

  • household incomes from selling FOP = expenditures by households on goods and services

• these 2 flows are also equal to the value of the goods/servies or the value of the total output produced by firms

size of changes affecting size of economy

• injections > withdrawals = economic growth

• withdrawals > injections = economic decline

• changes to any factors that influence gov spending, investment, exports, etc will increase/decrease size of circular flow of income

calculating national income

• all 3 approaches should provide the same figure

• value of finished goods is equal to expenditure paid to acquire them

• value of GDP = monetary worth

• volume of GDP = physical number

expenditure approach in calculating national income

• adds up value of all expenditures in the economy in a year

• consumption (C), gov spending (G) , investment (I) exports (X), imports (M) and net exports (X-M)

• nominal GDP = C + I + G + (X-M)

components of expenditure approach

• consumption: total spending on goods by consumers in an economy

• investment: total spending on capital goods by firms

• gov spending: total spending by gov in economy

  • doesn’t include transfer payments

• net exports: difference between revenue gained from selling goods abroad and expenditure on goods from abroad

income approach in calculating national income

• adds up payments for the FOP in a year

• includes wages (W), rent (R), interest from capital (I) and profit (P) from entrepreneurship

• national income = W + R + I + P

output approach in calculating national income

• adds up value of all finished goods produced within the economy each year

real GDP and GNI

• nominal means the metric hasn’t been adjusted for inflation, so it’s the actual value of all goods produced in an economy in a 1-year period

• real GDP & GNI is adjusted for inflation

• they’re calculated using a price deflator, GDP deflator, used to convert GDP/GNI from current prices to constant prices

• Real GDP = Nominal GDP / GDP deflator x 100

real GDP/capita & GNI/capita

• real GDP or GNI/capita = Real GDP or GNI/ the population

  • shows mean wealth of each citizen in country

  • provides insight on standard of living as it shows how much of the total output in an economy corresponds to each person on avg

PPP (purchasing power parity)

• PPP is a conversion factor, calculates relative purchasing power of different currencies

  • shows number of units of a country’s currency that are required to buy a product in the local economy, as 1$ would buy that product in the US

• helps make a more accurate standard of living comparison between countries

national income statistics to measure well-being

• national income statistics are useful for comparing countries

  • allow judgments to be made about relative wealth and standard of living within each country

  • allow comparisons to be made over same or different time periods

• real GDP is a better comparison than nominal GDP

  • one country may have higher rate of economic growth but much higher rate of inflation

• real GDP/capita is better than real GDP because takes into account population differences

• real GNI/capita is more realistic for analysing income available per person than GDP/capita

limitations of using GDP Data to compare living standards between countries over time

• lack of information on inequality

  • distribution of income in an economy is an average (GDP/capita)

  • differences in SOL within same country can be significant

• quality of goods

  • GDP provides no information on fluctuations of quality of goods

  • if quality worsens but prices are lower, SOL is judged to have increase, while poor quality may have actually decreased it

• doesn’t include unpaid work

  • if unpaid work was included GDP/capita would be higher

• differences in hours worked

  • GDP data doesn’t capture amount of time taken to produce the GDP/Capita

  • in 1 country where it takes less time to generate income than in a similar country, SOL should be higher

• environmental factors

  • doesn’t capture environmental and health impacts of generating income within a country

  • if there are fewer externalities in generating income in 1 country, SOL should be higher

the business cycle

• changes to real GDP that occur in the economy over time

  • it’s the actual growth

• real GDP fluctuates above and below the long-term trend rate of growth

• points in the cycle: peak, expansion, contraction, trough

  • peak: maximum real GDP

  • expansion: positive growth in real GDP, unemployment falling, general price level rising

  • contraction: negative growth in real GDP, growing unemployment of resources, falling price levels

  • trough: minimum real GDP

• flow of real GDP can be moderated by gov intervention

characteristics of a recession (contraction lasting for more than 6 months)

• occurs when there are 2 or more consecutive quarters of negative economic growth

• increased unemployment

• increasing negative output gap and spare production capacity

• low confidence for firms/households

• low inflation

• increase in gov expenditure leading to a budget deficit

characteristics of a boom

• increasing rates of economic growth

• decreased unemployment

• reduction of negative output gap or creation of positive gap, spare capacity reduced

• high confidence, more risky decisions

• increasing inflation

• improvement in government budget as tax revenue rises and expenditure falls

alternative measures of well-being

1. OECD Better life index

2. Happiness index

3. Happy Planet index

• GDP focuses on production, happiness includes health, relationships, environment, education etc

• national income statistics present more positive data while national happiness surveys present more normative data

• Easterlin Paradox: happiness and increases in income have a direct relationship up to a point, beyond that point relationship is less evident

OECD better life index

has 11 variables which it considers essential to well-being

• housing: living conditions and proportion of household expenditure spent on housing

• income: net income and net wealth

• jobs: job security, average earnings and unemployment rate

• community: social support networks

• education: quality of education

• environment: environmental health, pollution

• civic engagement: voter turnout and community involvement in legislation

• health: quality of healthy, life expectancy

• life satisfaction: overall satisfaction of life

• safety: how safe people feel walking alone at night

• work-life balance: percentage of employees working long hours, amount of time for leisure

happy planet index HPI

• measures sustainable wellbeing, how efficiently countries deliver long happy lives using the earths resources sustainably

• measures country’s progress using: Wellbeing, life expectancy, ecological footprint

• HPI score = wellbeing x life expectancy / ecological footprint

happiness index

• survey that measures happiness in 10 different areas of a persons life:

  • psychological well being

  • health

  • time balance

  • community

  • social support

  • education, art, culture

  • environment

  • governance

  • financial security

  • work