8.2 Measures of Economic Activity

Question 1

What is national income accounting?

Answer 1

measure of the value of the total aggregate output of an economy

Question 2

Why is national income accounting important?

Answer 2

1. It is important to assess a country’s performance over time
2. make comparisons between performance with other countries
3. Establish a basis for making policies that will meet economic objectives

Question 3

What are the three ways to measure national income or the value of aggregate output

Answer 3

1. expenditure approach
2. income approach
3. output approach

Question 4

What is the expenditure approach

Answer 4

add up the total amount of spending on final goods (ready for consumption, instead of inputs) from each component (C+I+G+X-M)

Question 5

What is the income approach

Answer 5

add up all income earned by factors of production

Question 6

What is the output approach

Answer 6

add up total value of output produced by each economic sector

Question 7

Define GDP

Answer 7

GDP is defined as the final monetary value of all goods and services produced within the geographical boundaries of a country over a specified time period (usually a year).

Question 8

Define GNI

Answer 8

GNI is defined as the total income received by all residents of a specific country, which is equal to the value of final goods and services produced by factors of production, regardless of where these factors are located

• a Russian’s worker’s output in Spain is included in Spain’s GDP, but her income sent to Russia is part of Russia’s GNI

Question 9

Define nominal value

Answer 9

measured in terms of prices that prevail at the time of measurement and do not take into account changes in price

Question 10

Define real value

Answer 10

measure of values that takes into account changes in prices over time (adjusted for inflation)

Question 11

Why are real values a better measure?

Answer 11

takes into account price changes and therefore, able to get a better indication of how actual output has changed and allows for meaningful comparisons over time, in regards to the value of output, income etc.

Question 12

What are per capita values?

Answer 12

total value of (output, income, expenditure) divided by the total population of a country

Question 13

why are per capita values important?

Answer 13

Useful figures to measure the standard of living in a country by providing an indication of how much of total income or total output corresponds to each person in the population on average.

1. Due to differing population sizes across countries:
   - if two countries have identical GDPs, but country 1 has twice the population as country 2, country 1’s GDP per capita would be half country 2’s.
2. Population growth:
   - If total GDP increases faster than population, then GDP per capita increase
   - if population increases faster than total GDP, then GDP per capita decreases.

Question 14

Why is PPP needed

Answer 14

different countries have different price levels. Therefore the same amount of money in a low-price country has greater purchasing power (can buy more) than in a high-price country. Therefore, if we do not take into account these price changes, we are unable to make accurate comparisons across countries in the value of output produced.

Question 15

What is PPP

Answer 15

purchasing power parities are special exchange rates by comparing values based on conversions of national currencies into US$ to eliminate the influence of price differences on the value of output or income