Introduction to Macroeconomics (GDP, GNI, Business Cycle)

Question 1

What are the 5 Macroeconomic objectives?

Answer 1

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

Question 2

Gross Domestic Product (GDP)

Answer 2

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

Question 3

Three method of calculating GDP

Answer 3

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 4

Formula for GDP

Answer 4

GDP = C + I + G + (X - M)

C = consumption
I = investment
G = government spending
X - M = net exports

Question 5

Gross National Income (GNI)

Answer 5

• 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 6

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

Answer 6

NNP/NNI = GNI - Depreciation

Question 7

Depreciation

Answer 7

The detorioration or loss of value of items over time

Question 8

Nominal GDP

Answer 8

GDP’s value at current price

Question 9

Real GDP

Answer 9

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

Question 10

GDP per capita

Answer 10

• 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 11

Limitations of the data

Answer 11

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
   Examples: illegal/migrant workers, tax avoidance
3. Externalities
4. Quality of life - hospitals, unis, schools, public goods and its long term effect
5. Composition of output - not all benefits all consumers
6. Distribution of income not shown

It measure the market value not the welfare.

Question 12

Green GDP

Answer 12

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

Question 13

Alternative measures of well-being

Answer 13

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

Question 14

Why gather national income data?

Answer 14

• comparisons over time
• comparisons between countries
• making conclusions about standards of living

Question 15

Who uses the data?

Answer 15

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

Question 16

Business Cycle

Answer 16

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).

Question 17

Boom (Business Cycle Phases)

Answer 17

High prices, high profits

Question 18

Recession/Downturn

Answer 18

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

Question 19

Depression/Slump/Trough/Bust

Answer 19

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

Question 20

Upturn/Recovery

Answer 20

Prices and profits on the rise

Question 21

Normal Times

Answer 21

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

Question 22

Recovery is…

Answer 22

• 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 23

A boom is…

Answer 23

• 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 24

A recession is…

Answer 24

• 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 25

Why can output not fall forever?

Answer 25

* 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 26

Pros of Boom

Answer 26

* High firm revenue * High investment * Increased spending * Incomes rise * Low unemployment * Increased productivity

Question 27

Cons of 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 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 employment, earnings and profits

Question 35

Cons of Upturn

Answer 35

Prices begin to rise

Question 36

Long Term Trend

Answer 36

Overall direction of the business cycle Tend to be considered as the **potential output** of the economy, not the actual growth

Question 37

What is the difference between a decrease in GDP and a decrease in GDP growth?

Answer 37

* 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