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


  1. 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


  1. 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