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? Who uses the data?
IB recognizes these: comparisons over time, comparisons between countries, and use in making conclusions about standards of living
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
- 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 level as each boom is higher than the last).
