Week 2 Flashcards
Microeconomics
Microeconomics is the study of how individuals, households and firms make decisions and how they interact with one another in markets.
Macroeconomics
Macroeconomics is the study of the economy as a whole.
The goal of macroeconomics is to explain the economic changes that affect many households, firms and markets at once.
Macroeconomics answers questions such as
Why is average income high in some countries and low in others?
Why do prices rise rapidly in some periods while they are more stable in other periods?
Why do production and employment expand in some years and contract in others?
THE ECONOMY’S INCOME AND EXPENDITURE
When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. Important to know how your economic activities counted in the whole economy
For an economy as a whole, income must equal expenditure because:
Every transaction has a buyer and a seller.
Every dollar of spending by some buyers is a dollar of income for some sellers
GDP
Gross domestic product (GDP) is a measure of the total income and expenditure of an economy.
It is the total market value of all final goods and services produced within a country in a given period of time.
The equality of income and expenditure can be illustrated with the circular-flow diagram.
THE CIRCULAR FLOW DIAGRAM
Photo in favourites on phone 25/7/18
GDP TEXTBOOK DEFINITION
GDP is the market value of all final goods and services produced within a country in a given period of time
GDP is the market value
Output is valued at market prices.
of all final
It records only the value of final goods, not intermediate goods.
Is your purchase of a second hand car included? Why?
Example of the housing services: measuring the rent
goods and services
It includes both tangible goods and intangible services.
produced
It includes goods and services currently produced, not transactions involving goods produced in the past.
within a country
It measures the value of production within the geographic confines of a country.
What is GNP?
in a given period of time
It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).
What is not counted in GDP
GDP excludes most items that are produced and consumed at home and that never enter the marketplace.
It excludes items produced and sold illicitly, such as illegal drugs (so, do not buy them…..)
The components of GDP
Y = C + I + G + NX
GDP (Y) is the sum of the following: consumption (C) investment (I) government purchases (G) net exports (NX)
Consumption (C):
The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I):
The spending on capital equipment, inventories and structures, including household purchases of new housing.
Government purchases (G):
The spending on goods and services by local, state and federal governments.
Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net exports (NX):
Exports minus imports.
Nominal GDP
Nominal GDP values the production of goods and services at current prices.
Real GDP
Real GDP values the production of goods and services at constant prices.
Real and nominal GDP example
3 photos in favourites on phone 25/7/18
The GPD deflator
The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
The GDP deflator is calculated as follows:
Nominal GPD divided by real GPD multiplied by 100
GDP AND ECONOMIC WELLBEING
GDP is the best single measure of the economic wellbeing of a society.
GDP per person tells us the income and expenditure of the average person in the economy.
Higher GDP per person indicates a higher standard of living.
However, GDP is not a perfect measure of the happiness or quality of life.
However, GDP is not a perfect measure of the happiness or quality of life.
Some things that contribute to wellbeing are not included in GDP.
the value of leisure
the value of a clean environment
the value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
However, GDP is not a perfect measure of the happiness or quality of life.
Is this really a problem?
Despite the shortcomings of the GDP measure, it does give us a good picture of happiness
GDP correlates very highly with various measures of subjective wellbeing where people report e.g. whether they are thriving (first graph below), how happy they are (the second graph), or whether they have smiled/laughed a lot (third graph)
Other Measures of Wellbeing that are all highly correlated with real GDP
Genuine Progress indicator
Physical Quality of Life Index
Happy Planet Index
Human Development Index
