Introduction to Macro (GDP, GNI, Business Cycle)

Question 1

Gross Domestic Product (GDP)

Answer 1

The total value of all goods and services produced within the borders of a country within a given period of time

Question 1

What are the 5 macreconomic objectives?

Answer 1

1. Price stability (inflation)
2. Low unemployment
3. Economic growth
4. Income equity
5. Favorable BOP

Question 2

Three methods of calculating GDP

Answer 2

Output method - sum of all value added by all firms grouped by sectors of society
Income method - sum of all income earned in economy (rent, wages, interest, profit, etc)
Expenditure method - sum of all spending on goods and services

National output = national income = national expenditure

Question 3

Formula for GDP

Answer 3

GDP = C + I + G + (X - M)
C = consumption
I = investment
G = government spending
X - M = net exports

Question 4

Gross National Income (GNI)

Answer 4

• A measure of national income that takes into consideration net property income from abroad
• GNI = GDP + income earned from assets abroad
• GNI = GDP - income paid to foreign assets operating domestically

Question 5

Net National Product / Net National Income (NNP/NNI)

Answer 5

NNP/NNI = GNI - Depreciation

Question 6

Depreciation

Answer 6

The deterioration or loss of value of time over time

Question 7

Nominal GDP

Answer 7

GDP’s value at current price

Question 8

Real GDP

Answer 8

• GDP but takes into account inflation
• Real GDP = (Nominal GDP / GDP deflator) x 100

Question 9

GDP per capita

Answer 9

• used to compare average income in a country and allow us to see income averages in a family
• GDP per capita = GDP / total population

Question 10

Limitations of the data

Answer 10

1. Inaccuracies - who is collecting the data? Source of numbers? How do you put a value?
2. Under-recorded/unrecorded economic activity “Hidden/Shadow Economy” / Informal economy: Informal sector - economic activity that is unrecorded/illegal/not taxed by the government authorities and is therefore not in the national accounts. Sometimes this is known as parallel markets or black markets. Examples: DIY, subsistence farming, personal gardens, tribal groups
3. Externalities
4. Quality of life = hospitals, unis, schools, public goods and its long term efect
5. Composition of output - not all benefits all consumers
6. Distribution of income not shown

It measures the market value not the welfare.

Question 11

Green GDP

Answer 11

• Monetizes the loss of biodiversity, and accounts for costs caused by climate change
• It is a measure of GDP that accounts for environmental destruction

Question 12

Alternative measures of well-being

Answer 12

• OECD Better Life Index
• Happiness Index
• Happy Planet Index

Question 13

Why gather national income data? Who uses the data?

Answer 13

Governments: policies, laws, balance the budget, growth over time, economic health

Business and Investors: future demand, business confidence, investment potential security

International organisations and other countries: living standards, trade potential, comparing countries

Economists: predicitons, analysis, research

IB recognizes these: comparisons over time, comparisons between countries, and use in making conclusions about standard of living

Question 14

Business cycle

Answer 14

• the business cycle is periodic but irregular fluctuations in economic activity that occur over time
• it is measured by fluctuations in real GDP and other macro variables
• Changes are cyclical. (Note: usually, the second recovery is at a higher levle as each boom is higher than the last).

Add diagram

Question 15

Boom (Business cycle phases)

Answer 15

High prices, high profits

Question 16

Recession/Downturn

Answer 16

• Prices and profits decline
• a recession is two consecutive quarters of negative GDP growth (falling GDP).

Question 17

Depression/Slump/Trough/Bust

Answer 17

Prices and profits are at their lowest levels. Contraction ends.

Question 18

Upturn/Recovery

Answer 18

Prices and profits on the rise

Question 19

Normal times

Answer 19

Static prices and profits. Shows a flattening of the curve. Either with a recovery or after a boom

Question 20

Recovery is…

Answer 20

• Economic expansion
• increase in consumer confidence
• output increases
• consumption and investment rise
• gdp rises
• firms take on more workers
• unemployment falls
• leads to a BOOM.

Question 21

A boom is…

Answer 21

• newly employed spend new incomes
• demand for money and investment increases –> pushes up interest rates
• inflationary pressure –> price levels are driven up (high inflation)
• economic growth

Question 22

A recession is…

Answer 22

• Fall in consumption and investment
• unemployment rises –> further consumption falls
• low demand –> deflation
• real incomes fall
• firms cut output and increase unemployment
• leads to a depression

Question 23

More about the business cycle

Answer 23

• the contraction (period when the economy is in a down turn) lasts on average 11 months
• the expansion (period when the economy is in upturn) lasts on average 44.8 months

Question 24

Why can output not fall forever?

Answer 24

• There are always some people with jobs to maintain a given level of consumption / production
• Demand for exports exists. the government is still spending. people are using their savings

Question 25

how long is a ‘typical’ business cycle?

Answer 25

• no simple answer. it is linked to and exacerbated by the electoral cycle
• since WWII most are 3-5 years peak to peak. to compare, the great depression (1923-33) was in decline for 43 months.

Question 26

Pros of Boom

Answer 26

• High firm revenue
• high investment
• increased spending
• incomes rise
• low unemployment
• increased productivity

Question 27

Cons of a boom

Answer 27

• inflation
• real income falls
• high costs/prices
• cannot last

Question 28

Pros of normal times

Answer 28

• Sustained economy - normal spending
• stable/static prices
• opportunity to save

Question 29

cons of normal times

Answer 29

no growth

Question 30

Pros of a recession

Answer 30

• cheaper products/lower prices
• Firms with savings (rich/dominant firms can expand)

Question 31

Cons of recession

Answer 31

• deflation
• low investment
• unemployment rises

Question 32

Pros of depression

Answer 32

cheaper products/prices

Question 33

cons of depression

Answer 33

• high unemployment
• no growth
• lower investments
• no profits

Question 34

Pros of upturn

Answer 34

increased employments, earnings and profits

Question 35

Cons of upturn

Answer 35

prices begin to rise

Question 36

Long term trend

Answer 36

trend to be considered as the potential output of the economy not the actual growth