13. Level of overall economic activity

Question 1

Define macroeconomics

Answer 1

MACROECONOMICS: concerned with allocation of nation’s resources and with five variables: growth, employmnet, price stability, external stability and income distribution

Question 2

Define economy’s national income

Answer 2

Economy’s national income = economy’s total output

Question 3

Explain circular flow of income model

Answer 3

Two sectors: households, firms exchnage payments - very simplified - in reality more sectors (foreign consumers/producers, government)

Question 4

Define household

Answer 4

Household: the poeple who buy the nation’s output of goods and services and are the owners of all of the economy’s factors of production

Question 5

Factor of production - its payment

Answer 5

Question 6

Leakages vs injections into economies

Answer 6

Leakages: savings, imports, taxes

Injections: loans/investment, exports, gov spending

Question 7

Define savings

Answer 7

SAVINGS: leakage from the circular flow of income, as it is income received but not used for consumption

Question 8

Define investment

Answer 8

INVESTMENT: injection into the circular flow of income, as it involves income that does not come straight from the households through their expenditure on goods and services.

Question 9

Methods for GDP calculation

Answer 9

1. The output method: measures total output produced in an economy - value added in each stage of production
2. The income method: measures all incomes earned in an economy
3. The expenditure method: measures all spending in an economy (spending by gov (G), by firms - investment (I), by households (C), in imports/exports (X-M)

national output = national income = national expenditure

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

Question 10

Define GDP

Answer 10

GDP: the total value of all goods and services produced in an economy over a period of time

Question 11

GDP vs GNP vs GNI

Answer 11

GDP - total economic activity regardless of who owns the productive assets

GNP/GNI - total income that is earned by a country’s factors of production regardless of where the assets are located

GNI = GDP + income from assets abroad - income paid to foreign assets operating domestically

Question 12

Define property income

Answer 12

PROPERTY INCOME: income earned by assets held abroad

Question 13

Explain NNI

Answer 13

GDP does not take into account the using up fo capital NNI = GNI - depreciation (capital consumption)

Question 14

Nominal GDP vs real GDP

Answer 14

Nominal GDP: does not take into account price level changes - inaccurate representation of economic growth

Real GDP: nominal GDP adjusted for inflation (takes into account price level changes)

Question 15

Define GDP per capita

Answer 15

GDP per capita: total GDP divided by the size of the population - more appropriate than simple GDP

Question 16

Why are national statistics gathered?

Answer 16

• compare/evaluate economic growth
• gov to make policies
• economists make forecasts about the future of economy
• businesses make forecasts about future demand
• rising national income usually correlates with increasing living standards
• basis for comparing different countries

Question 17

Limitations of statistical data

Answer 17

• inaccuracies
• unrecorded/under-recorded data on expenditure - informal markets
• external costs: resource depletion/extenralities
• composition of output: public goods may not reach every citizen

Question 18

Define green GDP

Answer 18

Green GDP: measure of GDP that takes into account any environmental costs taht incurred in production of goods and services

Green GDP = GDP - environmental costs of production

Question 19

Explain the business cycle

Answer 19

In developed economies a pattern of economic activity over years can be observed: increasing growth, falling growth again increasing growth - but each boom in higher GDP - constant overall economic growth - long-term trend

Question 20

Define business cycle

Answer 20

BUSINESS CYCLE: periodic fluctuations in economic activity easured by changes in GDP. Tha phases of business cycle include: boom, recession, through and recovery.

Question 21

Define recession

Answer 21

RECESSION: decrease in GDP in two consecutive years

Question 22

Conflicts between macroeconomic objectives in expansion/contraction periods

Answer 22