The Level of Overall Economic Activity
Circular Flow of Income
GDP & GNI
GDP
Total value of goods and services produced in an economy over time
● Eg. American company (A&F) in HK → will go towards HK’s GDP
● Green GDP: GDP - environmental cost
● Nominal GDP: doesn't take inflation into account
● Real GDP: takes inflation into account
● GDP per capita: total GDP/population
GNI/GNP
Total value earned by a country population, regardless of where the assets are located
● Eg. Indonesian domestic helper in HK → goes towards Indonesian GNP
\ GNI = GDP + net income from abroad
Calculations
Nominal GDP
GDP deflator = 100
I
Real GDP
Nominal GDP
Real GDP = 100
GDP deflator
,Measuring Economic Activity
● Expenditure Approach
○ Measures the value of all goods and services produced in the country
○ C + G + I + (X − M)
● Income Approach
○ Measures the value of all incomes earned in the economy
○ Rent + Wages + Interest + Profit = National Income
● Output Approach
○ Measures the value of all spending on goods and services
Evaluation of GDP/GNI
● May underestimate standards of living
○ Does not include output sold underground (eg. unreported income)
○ Does not include output not sold in markets (eg. food grown for yourself)
○ Does not take into account improvements in quality of goods and services
○ Does not take into account standard of living factors (eg. literacy, health…)
● May overestimate standards of living
○ Does not take into account negative externalities (eg. pollution, destruction of the
environment)
● May underestimate or overestimate standards of living
○ Disregard what output consists of (eg. high military goods, low merit goods)
○ Disregard distribution of income (eg. income inequality)
○ Disregard differing price levels in different countries
Alternatives
● Human Development Index (HDI)
○ Life expectancy
○ Education attainment
○ Income per capita
● Purchasing power parity (PPP)
○ Corrects for differing price levels in different countries
● Green GDP
○ Takes into account of environmental effects
, Business Cycle
● Peak: GDP is at its temporary maximum
○ Unemployment is low
○ Inflation is high
● Contraction: GDP is decreasing
○ Unemployment will start to increase
○ Rate of inflation decreases (disinflation or deflation)
○ Recession: a decrease in GDP for 2 consecutive quarters
● Trough: GDP is at its temporary minimum
○ Unemployment is high
○ Inflation is low
● Expansion: the economy will pick up again with the effort from the government/firms
○ Real GDP increases
○ Unemployment will decrease (especially cyclical)
○ Rate of inflation increases
Circular Flow of Income
GDP & GNI
GDP
Total value of goods and services produced in an economy over time
● Eg. American company (A&F) in HK → will go towards HK’s GDP
● Green GDP: GDP - environmental cost
● Nominal GDP: doesn't take inflation into account
● Real GDP: takes inflation into account
● GDP per capita: total GDP/population
GNI/GNP
Total value earned by a country population, regardless of where the assets are located
● Eg. Indonesian domestic helper in HK → goes towards Indonesian GNP
\ GNI = GDP + net income from abroad
Calculations
Nominal GDP
GDP deflator = 100
I
Real GDP
Nominal GDP
Real GDP = 100
GDP deflator
,Measuring Economic Activity
● Expenditure Approach
○ Measures the value of all goods and services produced in the country
○ C + G + I + (X − M)
● Income Approach
○ Measures the value of all incomes earned in the economy
○ Rent + Wages + Interest + Profit = National Income
● Output Approach
○ Measures the value of all spending on goods and services
Evaluation of GDP/GNI
● May underestimate standards of living
○ Does not include output sold underground (eg. unreported income)
○ Does not include output not sold in markets (eg. food grown for yourself)
○ Does not take into account improvements in quality of goods and services
○ Does not take into account standard of living factors (eg. literacy, health…)
● May overestimate standards of living
○ Does not take into account negative externalities (eg. pollution, destruction of the
environment)
● May underestimate or overestimate standards of living
○ Disregard what output consists of (eg. high military goods, low merit goods)
○ Disregard distribution of income (eg. income inequality)
○ Disregard differing price levels in different countries
Alternatives
● Human Development Index (HDI)
○ Life expectancy
○ Education attainment
○ Income per capita
● Purchasing power parity (PPP)
○ Corrects for differing price levels in different countries
● Green GDP
○ Takes into account of environmental effects
, Business Cycle
● Peak: GDP is at its temporary maximum
○ Unemployment is low
○ Inflation is high
● Contraction: GDP is decreasing
○ Unemployment will start to increase
○ Rate of inflation decreases (disinflation or deflation)
○ Recession: a decrease in GDP for 2 consecutive quarters
● Trough: GDP is at its temporary minimum
○ Unemployment is high
○ Inflation is low
● Expansion: the economy will pick up again with the effort from the government/firms
○ Real GDP increases
○ Unemployment will decrease (especially cyclical)
○ Rate of inflation increases
