Economic Indicators and Measurements Notes

GDP Per Capita

• Definition: The total GDP of a country divided by its population, reflecting the average economic output per person.

Purchasing Power Parity Exchange Rates (PPP)

• Concept: Special exchange rates that equalize the buying power of currencies, particularly focused on making the value of US$1 the same across different currencies.

Ways to Measure GDP

There are three primary methods to measure GDP:

1. Income Method

   • Definition: Summation of all incomes earned in the economy such as wages, profits, and rents.

2. Output Method

   • Definition: Total added value by all businesses within an economy.

3. Expenditure Method

   • Definition: Summation of all expenditures on final goods and services in the economy.

   • Formula: Y=Consumption+investment+governmentspending+(\exp orts-imports)

Income Method

• Components: Includes wages, profits, rents, and other forms of income.

Output Method

• Focus: Reflects the total added value generated by businesses in the economy.

• Concept of Added Value: The difference between a product's price and the total cost of the inputs used for its production.

Expenditure Method

• Essential Concept: It focuses on how much is spent on final goods (outputs).

Types of Goods

1. Consumer Goods: Products purchased by the ultimate user.

2. Capital Goods: Items bought by businesses for production purposes.

3. Final Goods: Goods that are used up in a production process.

4. Intermediate Goods: Goods used in the production of final goods.

Gross National Income (GNI) & Gross National Product (GNP)

• GNI: GNI = GDP + ext{net income from abroad}

• Importance: GNI includes income earned by residents from investments abroad minus income earned by foreign residents from domestic investments.

Net National Income (NNI)

• Formula: NNI = GNI - ext{depreciation}

• Definition of Depreciation: The decline in the value of capital equipment over time due to wear and tear.

Real vs. Nominal GDP/GNI

1. Nominal GDP/GNI: Values measured at current prices.

2. Real GDP/GNI: Values adjusted for inflation, measured at constant prices.

GDP Deflator

• Formula: ext{GDP Deflator} = rac{ ext{Nominal GDP}}{ ext{Real GDP}} imes 100

Potential GDP

• Description: The GDP that would be achieved at full employment and a stable inflation rate.

Limitations of GDP

• Non-market items (e.g., DIY activities) excluded.

• Black/grey economy activities not captured.

• GDP per capita doesn't accurately measure welfare or quality of life.

• Data inconsistencies can affect GDP figures.

Alternative Measures of Well-Being

1. OECD Better Life Index

2. Happiness Index

3. Happy Planet Index

Business Cycle

• Definition: The fluctuations in economic activity characterized by periods of expansion and contraction in GDP.

• Phases:

  • Expansion

  • Peak

  • Contraction (Recession)

  • Trough

  • Recovery

• Key Characteristics:

  • Economic fluctuations are irregular and unpredictable.

  • Most macroeconomic quantities tend to fluctuate together.

  • Typically, as output declines, unemployment rises.

Output Gap

• Definition: The discrepancy between potential GDP and actual real GDP.

Investment and Economic Fluctuations

1. During expansion:

   • Investments increase.

   • Market interest rates rise from low to high.

   • Consumer and business confidence increases.

   • Unemployment decreases.

   • Inflation may rise.

2. During recession:

   • Investments decrease.

   • Market interest rates fall from high to low.

   • Consumer and business confidence decrease.

   • Unemployment increases.

   • Deflation may occur.

   • Definition of Recession: Two consecutive quarters of declining GDP (not just a decline in GDP growth rate).