Lecture 1: Aggregate Economic Activity

Question 1

GDP

Definition

Answer 1

Measure of aggregate economic activity

Question 2

GDP

Formula and identification of sources + uses

Answer 2

Y = C + I + G + (X - M)
Sources of national income: Y + M
Uses of national income: C + I + G + X

Question 3

GDP

Measurement methods

Answer 3

1. Goods Produced
2. Expenditure
3. Income
   All three of these methods should have same result as goods produced are consumed using income

Question 4

GDP Caveats

Issues

Answer 4

1. Doesn’t measure wellbeing
2. Leaves out non-market activity
3. Doesn’t say anything about distribution of the national income
4. Doesn’t account for the depletion of resources (e.g. natural resources depleted in the production process)

Question 5

Aggregate income

Formula

Answer 5

Y = wL + rK
wL = labour income
rK = capital income

Question 6

Nominal GDP

Definition and formula

Answer 6

GDP at a current time, not accounting for inflation

Nominal GDP = Real GDP x GDP deflator (price index)

Question 7

Real GDP

Formula + methods of calculation

Answer 7

GDP taking into account for inflation
Methods of calculation:
1. Calculated using base year prices and current quantity
2. Chain weighted against previous year prices and current quantity