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Level of Overall Economic Economy - Coggle Diagram
Level of Overall Economic Economy
Measure of Economic activity
expenditure approach
measures the total amount of spending to buy final goods and services in a country
income approach
output approach
Economic activity
The circular flow of income model
Households, owners of factors of production (land labour, capital and entrepreneurship) sell these to firms. They also buy the products that firms produce
Firms buy the FOP and sell the goods and services to consumers
Households receive income when they sell their FOP in the form of rend(land), wages(labour), interest(capital), profit(entrep)
Consumers have household expenditures -> the money they use to buy goods and services
Firms has costs of production -> use to buy FOP
revenue -> when they sell goods and services
Leakages:
saving
taxes
import spending
Injections:
investment
government spending
export spending
Saving and investment
saving is a part of consumer income that is not spent
investment is spending for the production of capital goods
Household place their savings in financial markets (bank) and firm obtain funds from it
The funds flow back into the expenditure(injections)
Taxes and government spending
Tax was paid to government
Government spend on various activities (education)
Imports and exports
Imports (household spending that leaks out to other countries)
Exports (spending by foreigner who buy domestic goods and services)
Calculating nominal GDP based on national income accounting
GDP=C+I+G+X-M
GNI(nominal) = GDP + net income from abroad
nominal GDP-current output valued at current prices
real GDP - current output valued at constant (base year) prices
real GDP= nominal GDP/ price deflator x 100
real GDP per capita= real GDP/population of country
National income statistics and alternative measures
Evaluating national income statistics
Why measures of the value of output cannot accurately measure economic well-being
GDP and GNI make no distinctions about the composition of output
GDP and GNI cannot reflect achievements in levels of education, health and life expectancy
GDP and GNI provide no information on the distribution of income and output
GDP and GNI do not take into account increased leisure
GDP and GNI do not account for quality of life factors
National income measures and comparisons of economic well-being over time and between countries
Comparisons over time
An increase in real GDP of some percentage for a particular country may overestimate or underestimate the true change in the population's economic well-being because of such factors as improves products quality
Comparisons between countries
One country may have a high level of GDP per capita, which is concentrated among a small percentage of the population, while another may have a lower level of GDP percapita
Why national income statistics do not accurately measures the 'true' value of output
GDP and GNI do not take into account quality improvements in goods and services
GDP and GNI do not account for the value of negative externalities, such as pollution, toxic wastes and other undesirable by-products of production
GDP and GNI do not include output sold in underground (parallel) markets
Sale of legal goods and services at higher price and does not report the income received to avoid paying taxes
GDP and GNI do not take into account the depletion of natural resources
GDP and GNI do not include non-marketed output
GDP measures the value of goods and services that are traded in the marketplace and generate income for the FOP. Yet, some output is not sold in market and not generate income
GDP and GNI and differing domestic price levels
Goods and services often sell for very different prices in different countries
Alternative measures of well-being
Happiness Index
focused on gathering scientific and technological knowledge to encourage policies for sustainable development
Indicators
real GDP per capita
social support
healthy life expectancy
freedom to make life choices
generosity
perceptions of corruption
Limitations
happiness very difficult to quantify and measure
because different things to different people
OECD Better Life Index
purpose: provide forum for member countries to discuss common problems and policies, and to promote policies that will encourage economic well-being
Factors that determine well-being
quality of life
material conditions
Quality of life
State of health
Work-life balance
Education and skills
Social connections
Civic engagement/governance
Environmental quality
Personal security
Subjective well-being
Material conditions
Income and wealth
Jobs and earnings
Housing
Happy Planet Index
exploring based on equality, diversity and economic stability
HPI= (life expectancy x well-being x inequality of outcomes)/ ecological footprint
Life expectancy: average number of years a person expects to live
Well-being: population's satisfaction
Inequality of outcomes: inequality between people with regard to life expectancy
Ecological footprint: impact on environment
