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THE LEVEL OF OVERALL ECONOMIC ACTIVITIES (The Business Cycle (Recession…
THE LEVEL OF OVERALL ECONOMIC ACTIVITIES
The Business Cycle
long term growth of the economy measured by changes in GDP
Recession
two consecutive quarters of negative GDP growth
Fall in AD
Less spending
Rise in unemployment
Lower rates of inflation
Low consumer/ business confidence
Boom
Economy booms right after recovery
Consumer/ Business confidence peaks
Low unemployment
Peak in AD
Inflation rises
Recovery
Increase in AD
Increase spending -> Increase output by firms
Fall in unemployment
Increase DD on goods leads to increased average prices
Inflationary pressure
Trough
People with jobs maintain consumption
people use savings to finance consumption
Low DD for money lead to lower interest rates
AD gradually rises, cycle repeats itself
National Income
How it is measured?
Output method
Primary sector, raw materials
Secondary sector, manufacturing
Tertiary sector, services
Income method
Expenditure method
Consumption, by household C
Investment, by firms I
Spending By government G
Net Export, (X-M)
Types
Gross Domestic Product (GDP)
C+G+I+(X-M)
total of all economic activity in the country
Gross National Income (NNI)
GNP-depreciation
GNI that is adjusted with depreciation of capital
Gross National Product (GNP)
GDP-net property income from abroad
Real GDP
nominal GDP adjusted after inflation
GDP per capita
GDP per population
Green GDP
GDP-environmental cost
Importances
report card of a country
Government, develop policies
Economist, develop models of economy and make forecast
Businesses, forecast of future demand
living standard
Performance of an economy
Comparing different countries
Limitations
Inaccuracies
United Nations SNA work with all countries improving methods of gathering data
wide ranging sources
External cost
cost of negative externalities of production
Informal market
unrecorded or under-recorded economic activity
Black market, in 2010 GDP of Norway might be underestimated by 18.7%
Quality of life concerns
workers may be suffering from overwork
Composition of output
may not benefit consumers
Circular Flow of Income Model
Injection
Income going in the flow
Government spending
Investment
Export
Leakage
Income going out of the flow
Tax
Import
Savings
Components of income
Land
Rent
Entrepeneurship
Profits
Labour
Wages
Capital
Interest
Examples
Examples
Factors of Production
Payment to the Factor