Chapter 13

Gross Domestic Product (GDP):

• total monetary value of all final goods and services produced domestically in one year
  

Not included in GDP:

• intermediate goods (goods not in final form, eg. wheat, wood, salt)

• non-production transactions (used goods, financial transactions, eg. stocks, welfare payment)

• illegal activities (eg. transaction of drugs)

How to measure GDP: 

1. output method

   1. firms provide figure for output during year 

   2. output = actual value of goods + services provided (value - costs)

Benefits -> allows for statistical data based on sectors

Limitations -> doesnt include informal economic activities

2. income method

   1. adding up incomes of all groups where FoPs are sold

Benefits -> simple if formal economy

Limitations -> no informal activities added, corruption distorts statistics

3. expenditure method

   1. adding all total sales receipts for goods + services

closed economy = simple consumption

open economy = variables such as gov spending, investments, exports/imports

Gross National Income (GNI):

• total income of a nations people and businesses per year

• FoP a country owns and belongs to a country

Formulas

GDP = C + I + G + (X - M)

C -> consumption (purchasing by individual)

I -> investments (spending by businesses)

G -> gov spending

(X - M) -> exports - imports

GNI = GDP + (incomes flowing in - incomes flowing out)

• incomes flowing in = earned by asset abroad

• incomes flowing out = paid to foreign assets operating domestically

• net property income from abroad

Nominal GDP / GNI -> does not account for inflation

Real GDP / GNI -> adjusted for inflation

• real = always adjusted for income

Calculations: nominal GDP/GNI * price deflator = real GDP/GNI

• price deflator = nominal GDP/GNI / real GDP/GNI * 100

• price deflator = 100/(100+inflation rate)

GDP / GNI per capita

GDP/GNI per capita = GDP or GNI / population

Statistical Analysis

• shows whether country experienced economic growth

• helps develop policies

• helps develop models

• forecasts about the future

• comparing countries

Inaccuracies:

various sources = conflicting data

Unrecorded data:

informal / illegal markets

External costs:

examples -> loss of trees, air/water pollution, CO2 output

Quality of life:

doesn’t change depending on whether people take holidays or not / volunteering

The Business Cycle / trade cycle:

• real GDP v time

• size of an economy

• recovery or recession (two consecutive periods of negative growth)

• long-term trends = real size of economy (average trend of economy)

Benefits of expansion:

• real GDP increases (increased output)

• lower unemployment (increase in production)

  • higher wages -> more spending -> higher GDP

• higher imports, lower exports

• high inflationary pressure

Consequences of contraction:

• unemployment (due to decrease in production)

  • low wages -> less spending -> lower GDP

• real GDP decreases (due to decreased output)

• deflation = prices are down

• lower imports, higher exports

long term GDP growth = always positive

output gap = difference between actual output and potential / trend output

Negative output gap:

• low production -> deflation

• low employment

Positive output gap:

• high production -> high inflation

• high employment

short run = trade-off between inflation or unemployment

Other measures of economic well-being

OECD Better Life Index

• 35 member countries

• policies improving economic and social well-being

• 11 topics split into material living conditions and quality of life

Happiness index

• UN Sustainable Development Network

• 156 countries ranked by happiness

• data gathered through surveys

• variables include GDP per capita, social support, life expectancy, freedom, generosity, perceptions of corruption

Happy Planet Index

• sustainable well-being

• HPI = (well-being life expectancy inequality of outcomes) / ecological footprint