2 1 The Level of Overall Economic Activity
2 1 The Level of Overall Economic Activity
2 1 The Level of Overall Economic Activity
The Income Approach: measures all the factor incomes earned by the four different
factors of production in an economy over a given time period
Income Approach: rents + wages + interests + profits
Gross Domestic Product (GDP): the total value of all final goods and services
produced within a countrys borders in a year, regardless of who owns the
productive assets.
Gross National Product/ Income (GNP/I): the total income earned by a countrys
factors of production, regardless of where the assets are located.
GNI = GDP + net property income from abroad
Real GDP: Nominal GDP is GDP not adjusted for inflation (measured with prevailing
prices at time of measurement). Real GDP is adjust for inflation.
Real GDP = Nominal GDP adjusted for inflation
GDP deflator = (Nominal GDP)/(Real GDP) *100
= (100 + inflation rate)
Per capita: Total GDP/ Total Population
*Useful for comparisons with other countries in terms of living standards, since
different countries have different populations
Other considerations with respect to national income statistics and their use
for making comparisons between countries about standards of living
Composition of output (eg. is it national defence? May not benefit
consumers)
Income disparity/ distribution
Exchange rate for international companies (affects measure of output)
Statistical inaccuracies/discrepancies in data
Unrecorded economic activity/ informal markets
External costs/ social impacts (eg. resource depletion, environmental costs,
low working conditions) . Green GDP
Green GDP: measure of GDP that takes into environmental costs incurred by the
production of goods and services included in the GDP figures.
Green GDP = GDP environmental costs of production
(eg. health, agricultural, industrial costs air pollution, water pollution
BP oil spill in Mexico in 2010)
The Business Cycle
The regular patterns of increases and decreases in economic activity (actual GDP)
around the long-term trend (potential GDP, where unemployment rate = natural rate
of unemployment).
There are 4 phases in a business cycle:
1. Recovery
GDP increases, falling unemployment (which results in more spending)
Low rates of inflation, due to recession before (X, M, AD)
Low interest rates stimulates borrowing (C, I, AD)
Replacement of machinery and anticipation of recovery (C, I, AD)
A decrease in GDP is when there is a fall in the value of the output produced
(negative GDP growth), whilst a decrease in GDP growth is when there is a fall in
the rates of growth, although the GDP growth may still be positive.