Introduction to Macroeconomics (GDP, GNI, Business Cycle) Flashcards
GDP, GNI, GDP per capita, Business Cycle
What are the 5 Macroeconomic objectives?
- Price stability (inflation)
- Low unemployment
- Economic Growth
- Income Equity
- Favorable BOP
Gross Domestic Product (GDP)
The total value of all goods and services produced within the borders of a country within a given period of time
Three method of calculating GDP
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
Formula for GDP
GDP = C + I + G + (X - M)
C = consumption
I = investment
G = government spending
X - M = net exports
Gross National Income (GNI)
- 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
Net National Product / Net National Income (NNP/NNI)
NNP/NNI = GNI - Depreciation
Depreciation
The detorioration or loss of value of items over time
Nominal GDP
GDP’s value at current price
Real GDP
- GDP but takes into account inflation
- Real GDP = (Nominal GDP / GDP deflator) x 100
GDP per capita
- Used to compare average income in a country and allow us to see income averages in a family
- GDP per capita = GDP/total population
Limitations of the data
- Inaccuracies - who is collecting the data? Source of numbers? How do you put a value?
- 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
Examples: illegal/migrant workers, tax avoidance - Externalities
- Quality of life - hospitals, unis, schools, public goods and its long term effect
- Composition of output - not all benefits all consumers
- Distribution of income not shown
It measure the market value not the welfare.
Green GDP
- Monetizes the loss of biodiversity, and accounts for costs caused by climate change.
- It is a measure for GDP that accounts for environmental destruction.
Alternative measures of well-being
- OECD Better Life index
- Happiness Index
- Happy Planet Index
Why gather national income data?
- comparisons over time
- comparisons between countries
- making conclusions about standards of living
Who uses the data?
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: predictions, analysis, research
Business Cycle
Irregular ups and downs in economic activity, measured by changes in real GDP and other key indicators
- Changes are cyclical. (Note: usually, the second recovery is at a higher level as each boom is higher than the last).
Boom (Business Cycle Phases)
High prices, high profits
Recession/Downturn
- Prices and profits decline
- A recession is two consecutive quarters of negative GDP growth (falling GDP).
Depression/Slump/Trough/Bust
Prices and profits are at their lowest levels. Contraction ends.
Upturn/Recovery
Prices and profits on the rise
Normal Times
Static prices and profits. Shows a flattening of the curve. Either with a recovery or after a boom
Recovery is…
- 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.
A boom is…
- 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
A recession is…
- 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
Why can output not fall forever?
- 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.
Pros of Boom
- High firm revenue
- High investment
- Increased spending
- Incomes rise
- Low unemployment
- Increased productivity
Cons of Boom
- Inflation
- Real income falls
- High costs/prices
- Cannot last
Pros of Normal Times
- Sustained economy - normal spending
- Stable/static prices
- Opportunity to save
Cons of Normal Times
No growth
Pros of Recession
- Cheaper products/lower prices
- Firms with savings (rich/dominant firms can expand)
Cons of Recession
- Deflation
- Low investment
- Unemployment rises
Pros of Depression
Cheaper products/prices
Cons of Depression
- High unemployment
- No growth
- Lower investments
- No profits
Pros of Upturn
Increased employment, earnings and profits
Cons of Upturn
Prices begin to rise
Long Term Trend
Overall direction of the business cycle
Tend to be considered as the potential output of the economy, not the actual growth
What is the difference between a decrease in GDP and a decrease in GDP growth?
- Decrease in GDP means the entire GDP is going down (recession)
- A decrease in GDP growth means that the growth rate is slowing down, doesn’t mean that its not growing
