Week 7: Unit 13 Flashcards
The total GDP picture
— GDP at market prices (Price paid by consumers)
- taxes on products
+ Subsidies on products
— GDP at basic prices (Price received by producers)
- taxes on production
+ Subsidies on production
— GDP at factor cost (Price received by factors of production)
They are all the same
What is Economic Growth?
How is it measured?
An increase in the production of economic goods and services, compared from one period of time to another.
Percentage change in GDP from one year to the next
Tools in Economics
- Correlation vs Causation
- Reverse Causality
- Ratio (Log) Scale - Logarithm
- Linear regression
What is:
- The Business Cycle?
- Recession?
Business cycle = alternating periods of positive and negate growth rates
- Affects labour market outcomes (Wage/income, unemployment rate)
Recession = period when output is declining or below its potential level. “An economy is in recession when there is reduction in output for 2 consecutive quarters”.
ELEMENTS OF A BUSINESS CYCLE
EVERNOTE
ELEMENTS OF A BUSINESS CYCLE
- What is the period of growth and highest point called?
- What is the period of declining called and lowest point called?
- Expansion Period: Level of economic activity increases, more goods and services are being produced, Household expenditure increases, Interest rates decrease, inflation increases.
- Peak: The economy is using most of its resources (skilled labour/capital)There is upward pressure on prices and the balance on the current account worsens as a result of higher imports.
- Contraction Period: Level of economic activity decreases, less goods and services are being produced, spending declines, interest rates increase, inflation decreases, unemployment increases
- Trough: Turning point at the end of the contraction period, lower inflation allows central bank to lower interest rates, current account begins to improve due to low pries of exports and lack of domestic demand for imports.
Okuns law
A strong and stable relationship between unemployment and GDP growth
Changes in the rate of GDP growth are negatively correlated with the unemployment rate
Decrease GDP Growth associated with the increase in unemployment rate
Output falls —>Unemployment rises —>Well-being falls
What are national accounts?
3 equivalent ways to measure GDP:
System used to measure overall output and expenditure in a country
1) Total spending on domestic products
2) Total domestic production (Measured as value added)
3) Total domestic income
Circular flow model
————— Expenditure ——————
| Money spent on G/s |
\/ |
Firms ——>goods and services |
| Labour Force <——-Households
| /\
|________________________________________|
Value added by firms = Income
Two main questions to ask when measuring the economy?
Other things?
1) Size - How big is the country from an economic view?
2) Output per person - What is the standard of living of individuals in the economy?
Other:
- Output Growth - Rate of Change in Output
- Unemployment rate
- Inflation Rate
What is GDP?
+ Important elements?
Total value of all final goods and services produced within the boundaries of a country in a particular period.
- Total value
- Final goods and services (used or consumed by all)
- Within the borders of the country (Domestic production)
- Over a given period of time (Usually one year)
Gross means no provision for depreciation of capital goods and machinery is taken into account
Components of GDP/AD
- Consumption = Expenditure on consumer goods and services
- Investment = Expenditure on newly produced capital goods
- Government Spending = on goods and services excluding transfers to avoid double counting
- net exports(trade balance) = Exports(X) - Imports(M)
GDP/AD = C + I + G + X - M
Problems with GDP
- Has inflation contributed to the rise in GDP
Therefore, keep prices constant (REAL GDP)
Nominal GDP vs Real GDP
GDP growth = nominal
accurate measure = real
Is GDP a good measure?
Helps determine size of economy, but not helpful in Ellington us how the average person is doing
GDP per capita is better
However it struggles to give a good indication of living standards because:
- Happiness is subjective - No correlation between :) and GDP
- Extra production may = less leisure time
- not account of income distribution
- Time pressure to report may reduce accuracy Non-market production excluded (framing, subsistence, homemakers)
- lots of unrecorded/informal activity (i.e SA taxi, informal traders
- Developing countries have larger informal sectors if you pay cash, it may not get recorded so GDP is underestimated
