Chap 29 Flashcards
Define Gross domestic product (GDP)
the total output of a country
Methods of measuring GDP
The output, income and expenditure methods
Circular flow of income
The movement of expenditure, income and output around the economy
The methods of calculating GDP
- The output method:
adding up the output produced by all the industries in the country - The income method:
all the incomes which have been earned in producing the country’s output. (Transfer payments not included) - The expenditure method:
adding up all the expenditure on the country’s finished output.
(add exports and deduct imports)
Define Value added
the difference between the sales revenue received and the cost of raw materials used
Define Transfer payments
transfers of income from one group to another not in return for providing a good or service.
eg. pensions, unemployment benefits
GDP includes
consumption, investment, government expenditure and exports minus imports.
Define Nominal GDP
GDP at current market prices and so not adjusted for inflation.
How can you adjust nominal GDP by taking out the effects of inflation?
Multiply nominal GDP with the price index in the base year, divided by the price index in the current year
Define Real GDP
GDP at constant prices and so adjusted for inflation
Real GDP per capita
dividing real GDP by population
Why economic activity goes unrecorded
- Activity is on a small scale and there are relatively high costs of registering a business.
- Activity is illegal, such as illegal drug dealing, and work undertaken by immigrants who have not been given permission to work in the country.
- Person undertaking job does not want to pay
a tax on it. - Some employers may want their businesses to be in the informal economy, so they can avoid government regulations such as having to pay the national minimum wage.
Why do GDP figures tend to understate the true level of output
This is because of the existence of unrecorded economic activity, both legal and illegal, and non-marketed goods and services.
The size of undeclared economic activity is influenced by a number of factors
These include the number of activities that are declared to be illegal, tax rates, penalties for tax evasion and government regulations.
The existence of undeclared economic activity effects on an economy
- Understates the output produced through GDP figures
- Tax revenue is below what could be collected.
- Official inflation rate overstates the rate at which the general price level is rising (Prices charged in undeclared economic activity tend to rise less quickly than in the formal economy)
Define non-marketed goods and services
products which are not bought or sold
Eg. subsistence agriculture, people who clean their own houses and repair their own cars, are all providing products, but these are not counted in GDP.
Define Subsistence agriculture
the output of agricultural goods for farmers’ personal use.
Define Recession
a reduction in real GDP over a period of six months or more
Causes of a recession
- Decrease in aggregate demand
- Decrease in aggregate supply.
Why aggregate demand may fall (negative demand-side shock)
- Consumer expenditure could decline due to a fall in consumer confidence
- Investment could decline due to a fall in business arising from a global financial crisis
- The government
may cut back its spending and net exports could fall as a result of a rise in the exchange rate.
A decrease in aggregate supply (negative supply-side shock) could result from
- A rise in fuel or raw material costs;
would increase firms’ costs of production which may cause them to produce less.
Consequences of a recession
- Unemployment is likely to rise
- Lower living standards
- Investment discouraged
- Tax revenue will decline
- Government spending on benefits increases (^ budget deficit)
Causes of economic growth
- An increase in aggregate demand-> rise in output
- If the quantity or quality of resources increases
Consequences of economic growth
- Improve living standards of people
- Increase government tax revenue
- Political and economic standing and influence usually increases
Define International Monetary
Fund (IMF)
an international organisation
which promotes international cooperation and helps countries with balance of payments problems
Why would economic growth involve costs?
- If the economy is working at full capacity, it may be necessary to shift resources from making consumer goods to capital goods, in order for it to grow.
- Increase pollution
- Damage the natural environment
- Greater stress on workers
Define Sustainable economic growth
economic growth that does not endanger the country’s ability to grow in the future
The net impact of economic growth is influenced by
- Rate
- Means adopted to achieve it
- Distribution of its benefits
Advantages of a productive capacity increase over economic growth
- More goods and services can be enjoyed without an increase in prices (easier for firms and households to plan for the future and hence encourages investment)
- Extra resources which develop when productive potential increases, can
also be used to reduce levels of pollution
Policies to promote economic growth
- Expansionary fiscal and/or monetary policy
E.g A reduction in income
tax rates or a cut in the rate of interest
- Demand-side and supply-side policy measure
E.g Improved education and training to increase productive potential
