Name Kristian Villadsen

The Level of Overall Economic Activity Objectives Organizer

Define Macroeconomics:

Branch of economics that studies decision making for the economy as a whole, ie examining growth

Objective 1: List and explain the five main macroeconomic goals of an economy.

Economic growth	1. a steady rate of increase of national output
Employment	a low level of unemployment
Price stability	a low and stable rate of inflation
External stability	a favorable balance of payments position.
Income distribution	an equitable distribution of income

*The order here is quite logical, if it helps you remember.

Objective 2: Describe and illustrate the circular flow of income model of the economy for a closed (two-sector) economy and an open (four sector) economy with government and financial markets.

Closed (two-sector) micro circular flow model

Factor resource market

Product market

House holds

firms

expenditure

Goods and services

Rent, wages, interest profit

Land, labour, capital, etr

Open (four-sector) macro circular flow model

households

firms

expenditure

income

Investments

exports

Governments spending

Savings

imports

taxes

Notice/Know and understand the relationships!

Leakage Injection

Savings	Foregoing current consumption to allow future consumption -|banks	Investment	An increase in capital stock by firms to expand output -|borrow from banks
Imports	Spending on imports is a leakage -|the money flows out of circulation to foreign firms	Exports	Foreigners spend money to buy domestic products thereby injecting money into an economy
Taxes	Taxes are paid to the government (taking that money out of circulation)	Subsidies	Government spending injects money into the circular, flow.

Define Transfer Payments-

A payment to an individual from the government that does not expect an increase in output

Important Conclusions:

· The economy is in equilibrium when:

LEAKAGES=INJECTIONS

· If leakages rise without a corresponding increase in injections:

THE NATIONAL OUTOUT WILL FALL, THERE WILL BE LESS INCOME CIRCULATING.

· If injections rise without a corresponding rise in leakages:

THERE WILL BE MORE MONEY IN CIRCULATION

Objective 3: Distinguish between the output approach, the income approach and the expenditure approach for measuring national income. [know the different ways GDP is calculated]

*The most common measure of a country’s national income is gross domestic product (GDP).

There are three methods to calculate GDP:

1	The output method	Measures the actual value of the goods and services produced (# 3 on circular flow) Calculated by summing all the value added by all the firms in an economy (making sure not to double count by subtracting input cost) Data usually grouped according to different production sectors: primary, (agriculture, mining), secondary (manufacturing), tertiary (services)
2	The income method	Measures the value of all the incomes earned economy (wages, rent, interest, profits) (#2 on circular flow)
3	The expenditure method	Measures the value of all spending on goods and services in the economy. –Calculated by summing spending by different sectors in the economy (c+i+g+x-m (number 4 of circular flow) Consumption, investment, governments, net exports

National Output = National Income = National Expenditure

How accurate are these statistics? In theory they are always equal, is this really true? Why? Why not?

Presumably accurate depending how develpoe or underdeveloped the country may be

The data comes from may and varied sources so inevitably there are inaccucies leading to imbalances among the final values

Some inaccuracies are due to timing, some are due to collection

Objective 4: Define and distinguish between Gross Domestic Product (GDP) and Gross National Product (GNP)/ Gross National Income (GNI) as measures of economic activity.

GDP- The total value ofof all final goods+services produced in an economy in a given year measured by c+i+g+(x-m)

GDP- may be defines as the total value og all economic activity in a country regardless of who owns the productive assests

Ie. An Indian MNC operating within canadas borders and earning profit towards canadas GDP, not indias.

GNP/GNI-

Is the total income earned by a country’s factors of proudction regardless of where the assets are located?

Formula for GNP/GNI:

GNP= GDP + net property income from abroad (income earned by assets abroad minus income paid to foreign assets operating domestically)

GNI versus NNI: Net national product

NNI=GNI- depreciation of capital stock (capital consumption)

NNI takes into account the depracitate (loss of value) off capital or capital consumption due to:

Wear and tear as machinery is used

Damage to capital equipment

Absolute technology

Objective 5: Define and distinguish between total GDP & GNP/GNI and per capita GDP & GNP/GNI

Per capita:

Total gdp divided by the population

What does looking at per capita statistics allow for that looking at total statistics does not?

Comparison between countries

Objective 6: Define and distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI.

Nominal: number (not adjusted for inflation)

real: Number adjusted for inflation (done using the gdp deflator)

Why are ‘real’ values of national income statistics more valuable than nominal values?

Objective 6: Explain the meaning and significance of “green GDP”

Green GDP= GDP-enviromental costs of production

Green GDP is a measure of GDP that ctakes into account any environmental costs incurred from the production of the coods and services included in the GDP figures

China calculated green GDP for 2004 + showed a 3% costs for pollution

Stopped calculating the next year due to arguments

India is discussing calculating green GDP accounts in 2015

Objective 7: Evaluate the uses of national income statistics.

Why are they gathered?

	Act as a report growth been achived
	Gov. uses stats to develop policies
	Economist to stats to develop models and make forecasts
	Business use stats to male forecasts about future demand
	To measure performance of the economy over time (real)
	As a starting point for measuring the welfare of a nations people
	AS a base for comparing different countries

What are the limitations of national income statistics?

Inaccuracies	Dara used to calculate the measure comes from a variety of sources such as tax claims, output data and sales data. Figures tend to become more accurate overtime (after a lag) as they are revised Statisticians try to be as accurate as possible, and in more devoped countries The UN SNA works to improve data
Hidden economy	Unrecorded or under recorded economic activity, informal market -National income accounts only record information formally reported and officially recorded They don’t include do it yourself work or work done at home This is quite significan in devoping countries where much output does not get recorded Also the hidden economic (black market)
Externral costs	Negative externalities of production
Life concerns	GDP ,amu grow because people are working longer hours or taking power holidays
Composition of output	Is it possible that a large part of a countries outpit is in goods that do not benefit consumers -military equipment - in this case it would be hard to argue a higher GPD will raise living standards

Objective 8: Explain and illustrate the business cycle and its phases.

Periodic fluctuations in economic activity measured by changes in real GDP Demonstrates patterns seen in developed countries of periods of rising growth, followed by periods of slowing growth and even falling growth.

boom Recovery

recovery recession

trough

expansion contraction expansion

Long term trends and output gaps

Positive output gap-

the economy is producing above its trend- inflation is likely to be a problem.

Negative output gap-

gap- the economy is producing below its trend- unemployment is likely to be a problem

Objective 10: Calculate nominal GDP from national income data using the expenditure approach.

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

C = Household and personal consumption expenditures

I = Gross private domestic investment expenditures

G = Government consumption and gross investment expenditures

X = Expenditures on goods and services exported

M = Expenditures on goods and services imported