Ch 13 - The Level of Economic Activity
- Macroeconomics: larger scale economy which is concerned with the allocation of a nation’s resources
Five main variables:
- Economic growth
- Employment
- Price stability
- External stability
- Income stability
Circular flow of income model:
Output method: actual value of the goods and services produced
Income method: measures the value of all the incomes earned in the economy
Expenditure method: measures the value of all spending on goods and services in the economy
GDP: monetary value of all of the final goods and services produced in a year in a country
- GDP = national output = national income = national expenditure
- in a sophisticated economy, households do not trade with each other
- These factors have to be equal in order to encourage equilibrium. If they are unequal, flow increase and more money flows in than out
Leakages: a diversion of funds from a process. It is the money that escapes an economy in a circular flow of income
- imports are a leakage (income that is spent and not returned to firms)
- Taxes are a leakage
Injections: introduction of income into the flow
- Firms have access to savings by borrowing money from banks
- Investments allow the amount of income circulating in the economy to rise
- Exports are injection (source of income not coming directly from households)
- Government spending is an injection
National income is measured with: GDP = C+I+G+(X-M)
C: consumption
I: investment
G: government spending
(X-M), net import: export - import
Real GDP: GDP which has been adjusted for inflation
- Nominal GDP / GDP deflator * 100
NNI (net national Income): income of households, businesses, and the government
- NNI = GNI - depreciation
GNI/GNP: total income earned by a country’s factors of production regardless of where the asses are located
- GNP = GDP + net property income
- GNI = GDP + net factor income from abroad - income paid to foreign assets
- Real GNI = normal income * price deflator
GDP deflator: GDP*100 / (100 + inflation rate) = real GDP
GDP per capita: GDP divided by the size of the population
The business cycle: its fluctuations in economic activity are measured by changes in real GDP
- Fluctuations in practice → regular
Recovery:
- Economic expansion driven by aggregate demand as households + consumers spend more
- Firms increase their output as demand increases
- Newly employed workers spend their income on goods and services
Boom:
- Increased demand for goods and services pushes up average price (inflation)
- Rate of growth of GDP falls as the economy nears its potential output
- Policy makers may try to slow down growth (to reduce inflation) causing a fall in total demand, recession could begin
Recession:
- Two consecutive quarters of negative GDP growth
- Falling aggregate demand → laying off workers so unemployment rises
- Less spending → lower rates of inflation or deflation
Trough: when contraction comes to an end, aggregate demand will pick up and enter recovery phase
- Negative output gap: economy producing below its trend and unemployment will is likely to be an issue
- Positive output gap: economy producing above its trend and inflation is likely to be an issue