Measuring economic activity Flashcards
Leakages of the circular flow of income
- savings
- taxes
- import expenditure
Injections of the circular flow of income
- investment
- govt. expenditure
- export revenue
Components of GDP
consumption (C)
investment (I)
govt. expenditure (G)
net export revenue (X–M)
Calculating GNI
GDP+ net income from abroad
real GDP vs nominal GDP
calculations often overstate the value of GDP due to inflation (therefore distorting information)
GDP measured at current prices = nominal GDP
GDP measured at constant prices and adjusted for inflation = real GDP
real GDP = nominal GDP adusted for inflation
What is a recession and what happens in one (business cycle)?
A recession is a fall in GDP that lasts over two or more consecutive quarters (quarter = 3 months)
- C, I, and (X–M) gradually fall
- unemployment gradually rises
- business and consumer confidence levels gradually fall
What is a recovery and what happens in one (business cycle)?
A recovery occurs when the level of GDP starts to rise and the economy begins to recover from a trough.
- C, I, and (X–M) start to gradually rise
- more employment opportunities are created (unemployment gradually falls)
What is a boom and what happens in one (business cycle)?
A boom is the peak of the business cycle.
- economic activity is at its highest level (economic growth rises)
- unemployment is low
- business and consumer confidence levels are high
- C, I, and/or (X–M) are high
What is a trough and what happens in one (business cycle)?
A trough occurs at the bottom of a recession in the business cycle.
- C, I, and (X–M) are low
- unemnployment is high
- business failures are common and consumer confidence levels are low
- G may rise to help economy recover from recession
Alternative measures of well-being
OECD better life index: Includes quality of life (8 variables) and material conditions (3 variables). Variables all require natural, human, economic, and social capital, thus aiming to ensure future sustainability.
Issue: some variables are dificult to measure
Happiness Index: Looks at interdependencies between economic, social, and environmental factors. Extracted from real GDP per capita, health and life expectancy, freedoms, etc.
Issue: what is happiness?
Happy planet index: Attempts to create economic models centered around equality, diversity, and economic stability.
assumptions of the circular flow of income in a simple and closed economy
- no government sector
- no foreign sector (import/exports)
- households spend all income they earn
advantages of national income statistics (GDP and GNI)
- useful indicators of standards of living
- useful for making comparisons between countries
- useful for making comparisons over time
limitations of national income statistics (GDP and GNI)
- do not reflect distributions of income and wealth
- do not reflect differences in cost of living
- do not reflect extent of social welfare benefits and variations between countries
- fluctuating exchange rates make international comparisons of GDP over time less accurate
- do not account for the informal economy
- don’t measure standard of living
- don’t account for negative externalities
fall in GDP vs fall in GDP growth
fall in GDP: causes a recession if it occurs over two consecutive quarters
fall in GDP growth: economy is still growing, but at a slower rate than before
what is PPP (purchasing power parity)
Make the buying power of each currency equal to the buying power of US$1.
PPP eliminates the influence of price level differences accross different countries and is hence importance for making cross-country comparisons.
