unit 13 - measuring economic activity

4 Main Macro Objectives

• Full employment

• Economic Growth

• Price Stability

• Income distribution

The Expenditure Approach

counts the total spending on final goods and services within a year

Expenditure Approach formula

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

Income Approach

counts GDP through the market view of the circular flow of income, adding up all income earned from FOP, wages, interest, rent and profits are all factor payments

Income approach formula

W+I+R+P = C+I+G+(X-M)

Output Approach

seeks to determine the final value of all goods and services produced within a year

identify value at each stage and then the total is then added to the national income number

Output approach formula

GDP = national output = national income = national spending

GDP

Gross domestic product: monetary value of all goods and services produced in a country, geographically and domestically, in a year

GNI

Gross National income: the total domestic and foreign output ina country in a year

Subtracts foreign owned FOP in country and adds income in domestically owned FOP in other countries

Nominal GDP

measures value of current output at current prices

Real GDP

measures value of current output at constant prices, taking inflation into account

What accounts for a higher GNI or GDP

• High GDP: significant foreign presence in firms/workers

• High GNI: significant workers/firms who send income overseas

GDP formula

Consumption + Investment + Government Spending + Net exports

GNI Formula

GDP + (Factor income flowing in - factor income flowing out)

Real GDP Formula

(Nominal GDP/Price deflator) x 100

Price deflator formula

(Nominal GDP/Real GDP) x 100

What is real GDP/GNI per capita?

per head income

Benefits of GDP/GNI per capita

• gives approximate standard of living

• shows economic growth of populaton

Producing Power Parity (PPP)

buying power adjusted for local prices in difference economies, used to more accurately assess the standard of living available for a given income

How can national income statistics be used to measure economic wellbeing?

1. Comparing countries

• comparing the standard of living across countries

• allows us to recognize economic progress and ideas for further growth

2. Evaluation of Economic Performance Over Time

• Impacts policies made

• votes can use these results to assess the effectiveness of current governing approach

• business can use info to predict change in market demand

How does GDP underestimate country’s welfare?

• increasing life spans

• estimated value of black market and parallel market

• unpaid work

How does GDP overestimate country’s welfare?

• negative externalities

• under-reporting the loss of natural resources

What other information on economic wellbeing do national income statistics fail to provide?

• composition of output: real GDP values do not communicate the types of production and their value to society

• quality of life: trust in law, group participation, life satisfaction

• income distribution: unaware if lower income areas are receiving fair income distribution

OECD

Better life index

• intergovernmental organization for economic cooperation and development

• adds examination of gender disparities: level of satisfaction men and women experience at different indicators

• desplays regions at similar rankings

Happiness index

• created by UN Sustainable Development Solutions Network

• surveys indiviiduals based on their level of happiness

Happy Planet Index

• incorporates environmental impact

• combines self reporting happiness and life expectancy

• environmental impact by determining the amount of natural resources used per capita

The business cycle

used to show the fluctuations of national income in a long term trend

Recession - Business Cycle

two consecutive quarters of declining national output (when GDP declines over 6 months)

Recessionary Trough - Business Cycle

• lowest point of a recession

• no one knows when this point is hit until growth has resumed

• lowest point on GDP line

Recovery - Business Cycle

• as GDP line rises from trough

• returning to national output value prior recession

Expansion - Business Cycle

• economy grows beyond its intial level of output

• usually occurs in short bursts

Peak - Business Cycle

• when short bursts hit an apex

• only observed after another recession begins