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Measuring Economic Activity, AD, demand, Picture4, Screen Shot 2023-05-12…
Measuring Economic Activity
National Income Statistics
GDP: measures the monetary value of final goods and services that are bought by the FINAL consumer produced in a country in a given period of time.
The Output Method: final value of goods and services produced
The Income Method: value of all the incomes earned
The Expenditure Method: value of all spending on goods and services
GDP= Consumption + Investment + Government + (X-M)
Circular Flow of Income
disregards who owns the productive assets
Real GDP: Nominal GDP adjusted for inflation
nominal GDP: real GDP * price deflator / 100
Real GDP: nominal GDP/ Price deflator * 100
Price Deflator: nominal GDP / real GDP * 100
GNI: total income earned by a country's factors of productions regardless of where the assets are located
disregards where assets are located
GNI = GDP + net property income from abroad
Real GNI: Nominal GNI adjusted for inflation
Why are National Income Statistics gathered?
Government: develop policies
Economists: develop models and make forecasts
Businesses: forecast future demand
evaluating standard living of a country
comparing different countries
Purchasing Power Parity
Big Mac Index
Limitations
Inaccuracies
Unrecorded economic activity - informal markets
external costs
other quality of life concerns
composition of output
Business Cycle: pattern where there are rising periods of economic growth, followed by slowing growth or even falling growth
Increase in Aggregate demand->more employment->even more demand
->Inflation->growth slow down->lay off workers->even less spending->repeat
A: Negative output gap - unemployment; B: Positive output gap – inflation
Linked to electoral cycle!
Other measures of economic well-being
OECD Better Life Index
Happiness Index
Happy Planet Index
AD & AS
Aggregate Demand vs Demand
Components of AD
Consumption
spending by consumers on domestic goods and services
Investments
addition of capital stock to the economy
Government Spending
Net Exports
What causes change in consumption?
changes in income tax
changes in wealth
changes in consumer confidence
changes in consumer expectations regarding price
level of household indebtedness
changes in interest rates
What causes change in investment?
changes in business taxes
changes in business confidence/expectations
levels of corporate indebtness
changes in interest rates
technological change
What causes change in Government spending?
depends on political and economic priorities of the government
What causes change in net exports?
national income
exchange rates
trade policies
relative inflation
Aggregate Supply
Short Run AS
the period of time when the prices of the factors of production does not change; price of labor is fixed
Shift in SRAS
change in wage rates
change in cost of raw materials
change in price of IMPORTS
change in indirect taxes/subsidies
Long Run AS
when the prices of the factors of production do change
New Classical LRAS (belief in the market) vs Keynesian AS (gov intervention)
New Classical
perfectly inelastic
full employment level of output
economy is operating at full capacity
output is entirely determined by productivity factors of prod.
Keynesian AS
Does not distinguish between SR and LR
phase 1: spare capacity
phase 2: spare capacity used up
phase 3: full capacity
Shift
productivity increase
improvement in quality or quantity of factors of production
Macroeconomic Equilibrium
Short-Run
Long Run
New Classical Perspective
the economy automatically moves to long-run equilibrium
Inflationary Gap: economy is producing at a level of output greater than the full employment level of output
AD shifts to right -> rise in price -> SRAS shift to the left -> same output level, higher price
Deflationary Gap: economy is producing at a level of output less than the full-employment level of output
AD shift to left -> fall in price -> SRAS shift to the left -> same output level, lower price
economy moves to equilibrium without gov intervention
Keynesian Perspective
depends mainly on AD
below/close to/at full employ,emt
