2.1 Measuring economic activity Flashcards
How man sectors are there in a closed and simple economy
Household and firms
What does it mean if it is a simple economy
no government intervention
What does it mean if it is a closed economy
no foreign sector
no exports and no imports
Four factors of production
labour, capital, land and enterprise
What is the output flow
households give factors of production to the firms and firms use them to produce the output of good and services
Income flow
Land - rent
Labour - wages
Capital - Interest
Enterprise - Profit
Expenditure flow
household have expenditure on goods and services
What do you assume in a simple and closed economy
households spend all income they earn
no foreign markets
no savings and no investment
What are leakages
Savings
Import expenditure
Taxes
SIT
What are injections
Government spending
Investment
export expenditure
GIE
what do injections add to
the expenditure flow
what do leakages add to
the income flow
what are in a complex and open economy
Financial sector - savings and investment
government sector - taxes and government expenditure
Foreign sector - exports and imports
What does it mean if the sum of all leakages > sum of all injections
Savings + taxes + import expenditure > investment + government spending + exports
Circular flow of income will decrease
What does it mean if the sum of all leakages < sum of all injections
Imports, savings and taxes < exports, government spending and investment
The circular flow of income will increase
What should happen in an equal economy in theory
the output flow, income flow and expenditure flow should equal each other
How is national income measured
GDP = gross domestic product
Three different methods
Different methods of measuring GDP
The output method
The income method
The expenditure method
What is the output method
sum of all the value added all the firms in the economy
deduct the cost of inputs
defines GDP as the ‘total monetary value of all the final goods and services produced within an economy in a year
national output
What are the different production sectors int he economy
Agriculture and mining (primary sector)
Manufacturing (secondary sector)
Services (tertiary sector)
What is the income method
measures the value of all the incomes earned in the economy
GDP = wages + interest + rent + profit = national income
What is the expenditure method
Measures the value of all the spending on goods and services in the economy
Calculates by summing up the different factors
Consumption + investment + Government spending + foreign exports minus imports
C + I + G + (X - M) = national expenditure
What is the expenditure method
Measures the value of all the spending on goods and services in the economy
Calculates by summing up the different factors
Consumption + investment + Government spending + foreign exports minus imports
C + I + G + (X - M) = national expenditure
In theory what should be said about GDP
National output = national income = national expenditure
However, there are some inevitable inaccuracies in practice.
What is GNP/GNI
The gross national product/Gross national income
the total income that is earned by a country’s factors of production regardless of where the assets are located
What is GDP
the total of all economic activity in a country regardless of who owns the productive assets
What is the difference between GDP and GNP
GDP is within a certain location
GNP is decided by nationality no matter where they are located
How do you calculate GNI
GNI = GDP + (income earned from assets abroad - income paid to foreign assets operating domestically
GNI = GDP + net property income from abroad
What is inflation
a rise in the general price level across the economy
What is real GDP
Nominal GDP adjusted for inflation
What is a problem with comparing GDP over time
calculations overstate the value of GDP because of inflation
GDP measured at current prices is the nominal GDP so Real GDP can be used instead
How do you calculate GDP price deflator
GDP price deflator
100 + interest rate/ 100 x 100
How do you convert nominal GDP to real GDP
Real GDP = Nominal GDP/GDP deflator x 100
What is the difference between total GDP and GDP per capita
Total is the total GDP or total GNI/GNP
measures total economic activity of a country
Per capita is the total/ size of a population and measures standard of living of a country
per capita is more appropriate for comparing between countries in terms of standards of living
Why is national income statistics beneficial
- a useful indicator of standard of living - real GDP per capita
- Useful for making comparisons over time - real GDP and economic growth
- Useful for making comparisons between countries - real GDP per capita
- serves as a report card about the performance of economy - economic growth, government policy, objectives and adjistments
Why is national income statistics beneficial
- a useful indicator of standard of living - real GDP per capita
- Useful for making comparisons over time - real GDP and economic growth
- Useful for making comparisons between countries - real GDP per capita
- serves as a report card about the performance of economy - economic growth, government policy, objectives and adjistments
What are disadvantages of national income statistics
- Does not reflect distribution of income and wealth - measures the total but h=not how much everyone gets
- Does not show differences in the cost of living
- Does not reflect extent of social welfare benefits and the variations between countries
- Fluctuating exchange rates make international comparisons of GDP over time less accurate and less meaningful
- DO not reflect the composition of national output - USAs very large penguin on military technology compared to Europes very large spending on welfare benefits
- Does not account for negative externalities generate sin producing this national output - pollution, noise, stress, environmental destruction (Green GDP is more common nowadays, measures the GDP that accounts of environmental destruction)
- Does not account for size of the informal economy - unofficial production of goods and services - DIY, goring own food (developing countries)
- May be useful in measuring standard of living but not really useful indicator of quality of life - growth vs development.
What does the business cycle show
described the short-term fluctuations in economic activity in a country over time which creates a long term trend of growth in the economy
what are the four parts of the business cycle
recession
trough
recovery
boom
What are the axis of the business cycle
shows the relationship between the real GDP (dollars usually) over time
What is a recession
the fall in GDP that lasts over two or more consecutive quarters
during a recession, Consumption spending, investment and net exports gradually fall
unemployment gradually rises
business and consumer confidence levels gradually fall
What is a trough / slump
occurs at the bottom of a recession in the business cycle
Consumption, investment and net exports are low
unemployment is high
business failures are common and consumer confidence levels are low
Government may ride to help economy recover from the recession
during this it is a period of contraction
What is a recovery
Real GDP begins to rise, and the economy begins to recover from a slump/trough
Consumption + investment + net exports gradually rise
more employment opportunities are created, unemployment falls
it is a period of expansion in economic activity
What is a boom
the peak of the business cycle
economic activity is at its highest level, economic growth rises
unemployment is very low
business and consumer confidence levels are high
often there is inflation
Consumption, investment, government and net exports are usually high as well
this is the end of the expansion phase, a short term fluctuation
What are recession, troughs, recoveries and booms
they are short term fluctuations
what is the long term trend in a business cycle
The potential output, or potential GDP of the economy
- economic growth increases the long-term productive capacity of the economy - shifts the PPC outwards
- exogenous shocks like infections diseases, natural disasters, like earthquakes, global financial crises, can all negatively affect the potential growth of an economy
what is the general assumption of the long term trend of the economy
assuming there are no exogenous shocks, the long term trend is expected to be in a trend of growth in an increase in GDP over time
Distinguish between a fall in GDP and a fall in GDP growth
Fall in GDP causes a recession if it occurs over two consecutive quarters
A fall in GDP growth means the economy is still growing but at a sower rate than before
Advantages of GDP
- allows for comparison
- informs policy makers
- gives indication of average income
disadvantages of GDP
- overestimates the quality of life
- does not account for disparity in income distribution
- contains inaccuracies
- does not account for improvements in quality of output
What doe PPP tell us
the size of an economy by its power to purchase goods and services within that country.
Alternate measures of well-being
World happiness report OECD better life index Gross national happiness Happy planet index Green GDP
What is the world happiness report
used as an indicator of people’s happiness in the measures of economic development. Measured using the cantorial ladder where they rate their happiness
What is the OECD better life index
measures 11 indicators: housing income jobs community education environment civic engagement health life satisfaction safety work-life balance
What is the gross national happiness
looks at many other different aspects that are said to be equally as important
What is the happy planet index
uses four indicators to demonstrate how effieicnetly residents of different countries are suing environmental resources to lead long happy lives
wellbeing x life expenstancy x inequality of outcomes /
ecological footprint
