Unit 3: Economic activity 3.1 - 3.1

GDP (definition)

The value of total output produced in an economy over a period of time.

GDP (methods to calculate)

1. Income: Wages + Rent + Interest + Profit

2. Output: sum of 1st, 2nd, 3rd sectors’ outputs

3. Expenditure: C + I + G + (X – M) (This will give you GDP at market prices. To get GDP at factor costs you add subsidies and take away taxes)

Limitations to using GDP to measure economic activity

• GDP does not take into account negative effects on the environment such as pollution or use of natural resources

• Shadow economy (also known as black markets) is not taken into account including those working illegally

• People who are doing unpaid work (volunteering or within a family) are not included

• Everything that is produced and consumed by people themselves is not included in GDP (e.g. potatoes grown by Smith and consumed by his family are left unrecorded)

• Improvements in the quality of output produced are not considered

Circular flow of economy (injections vs leakages)

If injections > leakages in the circular flow, national income increases.

If leakages > injections in the circular flow, national income decreases.

Nominal GDP (definition

Nominal GDP measures the value of all final goods and services produced in an economy within a given time period (typically one year), using current price levels. This means that nominal GDP is not adjusted for changes in price levels over time (non-inflation adjusted).

Nominal GNI

Gross national income (GNI) measures the value of all income earned by the country’s citizens including income earned from abroad.

NOMINAL GNI (formula)

GNI = GDP + net income from abroad

Net income from abroad = Income from abroad – Income sent abroad

Real GDP and GNI (definition)

Real GDP and real GNI are measures of economic activity which are calculated using constant prices, meaning the values are adjusted for changes in price levels over time. So, GDP/GNI adjusted for inflation.

Real GDP and GNI (formulae)

Real GDP/GNI per capita

Real GDP per capita and GNI per capita are economic indicators that compare the average wealth of citizens in different countries. R

Real GDP/GNI formulae

Purchasing power parity (PPP)

Refers to the exchange rate needed to buy the same basket of goods and services in different countries using the same amount of money, i.e., the exchange rate needed for the same purchasing power across countries.

Purchasing power

Refers to the amount of goods and services that can be bought with one unit of a currency.

Business Cycle

Business cycle – output and unemployment

Green GDP

Gross Domestic Products that takes into account the monetary value of loss of biodiversity, damage done (costs) to the environment.

(Green GDP = GDP – costs to the environment)

Alternate measures for wellbeing

• OECD Better Life Index (BLI)

• Happiness Index

• Happy Planet Index (HPI)

OECD better life index

• housing

• income

• jobs

• community

• education

• environment

• civic engagement

• health

• life satisfaction

• safety

• work–life balance. 

However, the BLI has been criticised as it focuses on a rather narrow set of indicators. It ignores others such as community involvement and degradation of the environment. It is also criticised because the criteria are influenced by the personal preferences of the participant. It is also possible to change the ranking by changing the weight of each variable.

Happiness Index (World Happiness Report)

1. Psychological Well-Being
   Optimism, sense of purpose/accomplishment

2. Health
   Energy levels and ability to perform everyday activities

3. Time Balance
   Enjoyment, sense of leisure, frequency of feeling rushed

4. Community
   Sense of belonging, volunteer levels, sense of safety in the community

5. Social Support
   Satisfaction with friends and family, feeling loved, and degree of loneliness

6. Education, Arts, and Culture
   Access to cultural and educational events and diversity

7. Environment
   Access to nature, pollution levels, and level of conservation

8. Governance
   Trust in government, sense of corruption, and competency of authorities

9. Material Well-Being
   Financial security and meeting basic needs

10. Work
    Compensation, autonomy, and productivity

The indicator is measured using the 

Cantril ladder

Happy Planet Index (HPI)

The Happy Planet Index (HPI) uses four indicators to demonstrate how efficiently residents of different countries are using environmental resources to lead long, happy lives. These indicators are: 

• well-being, which is how satisfied people are with the quality of their lives

• life expectancy, which is how long people are expected to live for

• inequality of outcomes, which measures the inequalities among people within a country and is expressed as a percentage

• ecological footprint, which is the average impact that people make on the environment 

Because of the inclusion of ecological factors, some of the wealthier countries do not figure at higher ranks in the list.