3.1 Economic Activity Flashcards
What is the circular flow of income model?
It represents the relationship between firms and households in an economy.
What happens if households stop spending?
Firms will stop as well.
What occurs when households increase spending?
Firms expand, produce more goods and services, and pay higher incomes.
What are the injections into the circular flow of income?
- Government spending
- Financial industry lending
- Foreign demand for goods and services
What are leakages from the economy?
- Delayed investments by firms
- Increased taxes by the government
- Domestic consumers buying foreign products
What does GDP stand for?
Gross Domestic Product
What does GDP measure?
The value of everything produced in a country in a specific time period.
What is the difference between GDP and GNP?
GNP includes net income earned from abroad.
What does GNP stand for?
Gross National Product
What does GNI stand for?
Gross National Income
What is a major issue with GDP when considering multinational corporations?
GDP may underrepresent income earned from foreign investments.
What are some proposed solutions for climate change?
- Carbon taxes
- Ending fossil fuel subsidies
- Encouraging investment into alternatives
- Carbon trading schemes
What is one advantage of GDP?
Allows comparison across countries.
What is a disadvantage of GDP?
Overestimates the quality of life.
How does GDP inform policy makers?
It measures economic growth through percentage changes in economic output.
What does GDP per capita represent?
The average income earned by a citizen of the country.
What is a limitation of GDP regarding income distribution?
It does not account for disparity in income distribution.
What inaccuracies can affect GDP calculations?
Difficulties in data gathering and potential biases in reporting.
What is a criticism of GDP regarding product quality?
It does not account for improvements in the quality of output.
Fill in the blank: GDP is a measure of _______.
economic activity
True or False: GDP accounts for environmental degradation.
True
What are the two exchanges that exist between firms and households?
- Consumption expenditure in exchange for goods and services
- Factor payments in exchange for the factors of production
What are the factors of production involved in factor payments?
- Land
- Labour
- Capital
- Entrepreneurship
What is necessary to consider when studying markets in microeconomics?
The economy as a whole, made up of all productive markets
What does the circular flow of income illustrate?
How the accounting of national income in a country is determined
What are the three approaches to measuring national income?
- The output method
- The income method
- The expenditure method
What does the output method involve?
Surveying firms for their output during a given period
What is counted in the output method of accounting?
Only the value added at each stage of production
What is a challenge in measuring output in countries with informal economic activities?
Informal activities not being included in GDP statistics
What sectors were particularly affected during the financial crisis of 2008?
- Construction
- Banking
What does the income method of accounting involve?
Adding up all income earned by groups when factors of production are sold
What are the types of payments received by owners of factors of production?
- Wages
- Rent
- Interest
- Profits
What complicates the measurement of national income using the income method?
High levels of corruption and unregistered economic activity
What challenge do emerging economies face with the income method?
Large portions of the population may not be formally registered
What is the expenditure method of national income accounting?
Adding up total sales receipts for goods and services sold in the economy
In a closed economy, what does the expenditure method measure?
Consumption
What additional components does the expenditure method include in an open economy?
- Government spending
- Investment
- Net exports
What type of documents do statisticians use to construct the expenditure measure?
- Sales receipts
- Credit card statements
- Utility bills
True or False: All three methods of national income accounting should result in different values of total production.
False
What does GDP stand for?
Gross Domestic Product
What does GNI stand for?
Gross National Income
What is nominal GDP?
GDP measured in current prices without adjusting for inflation
What is real GDP?
GDP adjusted for inflation, holding prices constant
What can overestimate GDP growth during high inflation?
Nominal GDP
What is the expenditure method for calculating GDP?
GDP = C + I + G + (X – M)
In the expenditure method, what does C represent?
Consumption expenditure
In the expenditure method, what does I stand for?
Planned investment spending
In the expenditure method, what does G represent?
Government expenditure
In the expenditure method, what does X - M represent?
Trade balance (exports - imports)
What does the output method consider?
The volume of production from different industries
What is avoided by using the output method?
Double counting
What are the broad categories considered in the output method?
Primary, secondary, tertiary sectors
What does the income method consider?
Incomes from factors of production or factor payments
What are the components of factor payments?
- Wages
- Rent
- Interest
- Profits
How is GNI calculated?
GNI = GDP + incomes flowing in from other countries - incomes flowing out to other countries
What does GNI show?
Economic activity of a country on both international and domestic scales
True or False: Nominal GDP accounts for inflation.
False
Fill in the blank: The total expenditure in an economy is known as _______.
Aggregate Demand
What is the significance of the circular flow of income in GDP measurement?
Income, output, or expenditure will yield the same GDP result
What happens to the value of output in different industries during a recession?
It varies depending on the elasticity of demand for products
What does high PED indicate about manufactured goods during economic downturns?
Large purchases are often delayed
What is a key factor influencing the response of different industries to economic stimulus?
Differences in elasticity of demand
What is the role of foreign citizens in GNI calculation?
Their incomes earned within the country are subtracted from GNI
Formula for GDP (exp method)
GDP = C + I + G + (X – M)
What is the purpose of a deflator in calculating Real GDP and GNI?
To reduce their nominal values using a price index for inflation.
How is Real GDP calculated?
Using nominal GDP adjusted for inflation.
How is Real GNI calculated?
Using nominal GNI adjusted for inflation.
What does GDP per capita indicate?
The average output or income produced by an individual in a country.
What formula is used to calculate GDP per capita?
GDP per capita = (Total GDP/Population)
What is the significance of GDP per capita in economic comparisons?
It provides a clearer account of well-being than just total GDP.
What does Real GNI per capita indicate?
The income per person in the country.
What is Real GDP growth?
Nominal GDP growth adjusted for inflation.
What is GNI?
GNI = GDP + Net property income from abroad.
What does Purchasing Power Parity (PPP) measure?
The size of an economy by its power to purchase goods and services.
What does the Big Mac Index illustrate?
The PPP cost of a Big Mac hamburger in different countries.
True or False: Higher total GDP always indicates higher living standards.
False.
What is the primary limitation of using total GDP for economic comparisons?
It does not account for population size or individual economic activity.
fromula for real gdp
( nominal gdp / price deflator ) x 100
formula for real gni
( nominal gni / price deflator ) x 100
What is the business cycle?
Fluctuations in economic output activity over time
Also known as the economic or trade cycle.
List the four phases of the business cycle.
- Expansionary phase
- Peak phase
- Contractionary phase
- Trough phase
How can economies begin to recover from a downturn?
With government intervention or naturally
What does a positive output gap indicate?
GDP is above potential output
What does a negative output gap indicate?
GDP is below potential output
True or False: Potential output can be clearly measured.
False
What is the difference between a decrease in GDP and a decrease in GDP growth rate?
- Decrease in GDP: Fall in economic output (recession if over two quarters)
- Decrease in GDP growth rate: Increase in GDP but at a slower rate
What type of values should be used for comparisons of living standards over time?
Real values of GDP and GNI
Why are nominal values unsuitable for economic comparisons?
They do not accurately reflect changes in living standards
What limitations exist when comparing economic well-being between countries using GDP and GNI?
- High GDP per capita may not indicate widespread wealth
- Low GDP per capita may still reflect a more equitable income distribution
Fill in the blank: A decrease in GDP is a fall in economic output, or a _______ if occurring for longer than two quarters.
recession
What does GDP measure?
A country’s economic growth
GDP does not account for factors like environmental impact or people’s well-being.
Name three alternative indicators to GDP.
- Gross National Happiness
- Better Life Index
- Happy Planet Index
What is the purpose of the World Happiness Report?
To include an indicator of people’s happiness in measures of economic development
How is happiness measured in the World Happiness Report?
Using the Cantril ladder
What does the Cantril ladder represent?
Levels of happiness from least happy to happiest life
How many indicators does the OECD Better Life Index measure?
11 indicators
List four indicators measured by the OECD Better Life Index.
- housing
- income
- jobs
- community
What is a criticism of the OECD Better Life Index?
It focuses on a narrow set of indicators
Why is GDP still widely used despite its shortcomings?
Due to its historical use and familiarity across countries
What is the Gross National Happiness (GNH) indicator?
An index developed in Bhutan to define growth and development holistically
What are the four pillars of GNH?
What does the Happy Planet Index (HPI) measure?
Efficiency of using environmental resources for happy lives
List the four indicators used by the Happy Planet Index.
- well-being
- life expectancy
- inequality of outcomes
- ecological footprint
How does the HPI calculate a country’s score?
Using a mathematical equation
What is a key criticism of the Happy Planet Index?
The subjective nature of experienced well-being
What is Green GDP?
An adjusted measure of GDP that accounts for environmental degradation
What was first discussed by economists William Nordhaus and James Tobin in 1972?
Altering GDP to account for unpaid work and environmental degradation
Fill in the blank: Green GDP accounts for _______.
environmental degradation
What happens to GDP when more people are paid to clean up the environment?
GDP increases
