13. Level of overall economic activity Flashcards
Define macroeconomics
MACROECONOMICS: concerned with allocation of nation’s resources and with five variables: growth, employmnet, price stability, external stability and income distribution
Define economy’s national income
Economy’s national income = economy’s total output
Explain circular flow of income model
Two sectors: households, firms exchnage payments - very simplified - in reality more sectors (foreign consumers/producers, government)
Define household
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
Factor of production - its payment
Leakages vs injections into economies
Leakages: savings, imports, taxes
Injections: loans/investment, exports, gov spending
Define savings
SAVINGS: leakage from the circular flow of income, as it is income received but not used for consumption
Define investment
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.
Methods for GDP calculation
- The output method: measures total output produced in an economy - value added in each stage of production
- The income method: measures all incomes earned in an economy
- 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)
Define GDP
GDP: the total value of all goods and services produced in an economy over a period of time
GDP vs GNP vs GNI
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
Define property income
PROPERTY INCOME: income earned by assets held abroad
Explain NNI
GDP does not take into account the using up fo capital NNI = GNI - depreciation (capital consumption)
Nominal GDP vs real GDP
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)
Define GDP per capita
GDP per capita: total GDP divided by the size of the population - more appropriate than simple GDP
Why are national statistics gathered?
- 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
Limitations of statistical data
- inaccuracies
- unrecorded/under-recorded data on expenditure - informal markets
- external costs: resource depletion/extenralities
- composition of output: public goods may not reach every citizen
Define green GDP
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
Explain the business cycle
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
Define business cycle
BUSINESS CYCLE: periodic fluctuations in economic activity easured by changes in GDP. Tha phases of business cycle include: boom, recession, through and recovery.
Define recession
RECESSION: decrease in GDP in two consecutive years
Conflicts between macroeconomic objectives in expansion/contraction periods
