3.1 ECONOMIC ACTIVITY
Macroeconomics: studies the economy as a whole and its economic objectives
Circular Flow of Income of an Open Economy:
Leakages: TSM; Injections: GIX
OUTPUT = INCOME = EXPENDITURE
If Leakages > Injections = CFOI becomes smaller
If Leakages < Injections = CFOI becomes larger
● Government of UK imposes a sugar tax 2018
● An increase in taxes leads to an increase in the size of leakages
● When leakages > injections , slower economic growth
● consumers might be less confident about the economy and they will chose to spend less
● Firms will respond by decreasing the amount of goods and services in order to
● lose less revenue and match the decrease in the demand for their products
● Less Fops are consumed
● unemployment increases
● Income decreases and the size of the entire economy is reduced
● An increase in export revenue leads to an increase in the size of injections
● When injections > leakages, faster economic growth
● consumers are more confident about the economy and they will chose to spend more
● Firms will respond by increasing the amount of goods and services in order to lose less
revenue and match the increase in the demand for their products
● More Fops are consumed, unemployment decreases
, ● income increases and the entire economy grows
MEASURES OF ECONOMIC ACTIVITY
GDP vs GNI
GDP: The market value of all final goods and services GNI: the total income received by the residents of a
produced WITHIN a country over a time period, country in a year, regardless where the factors of
regardless of who owns the factors of production. production owned by the residents are located
GDP (the value of output) is likely to differ from GNI (income received by the residents of a country) because
income from FOP usually flows across international boundaries. Therefore income received may be greater or
less than the value of output produced:
Factor income received from abroad: Factor Income sent abroad:
● income received by domestic residents sent to ● wages of foreign workers working domestically
them by relatives working abroad (known as sent to their relatives back home (remittances)
remittances) ● profits of foreign multinational corporations
● profits of multinational corporations (also a operating domestically sent back to their
form of income) earned abroad and sent home country (profit repatriation)
home (known as profit repatriation)
✵ GDP is a better measure of the value of output produced by a country than GNI (GNP).
✵ GNI (GNP) is a better measure of the amount of income earned by the residents of a country.
** Measuring GDP by the Measuring GDP by the INCOME Measuring GDP by the OUTPUT
EXPENDITURE APPROACH: APPROACH: APPROACH:
Adds up all income earned by the
Adds up total spending to buy all final four factors of production in the Calculates the value of all final goods
goods and services within a year. course of producing total output and services produced in a country
There are four components within a year: over a time period.
of spending:
Rent earned by land The value of goods and services is
Consumption spending (C): All Wages earned by labor calculated for each sector in the
spending by consumers to buy goods Interest earned by capital economy, such as:
and services Profit earned by entrepreneurship
Investment spending (I): All spending ● goods in the agricultural
by firms to buy capital goods plus all Rent + wages + interest + profit = sector
private construction national income ● goods in the manufacturing
Government spending (G): All sector
spending by the government, National income is another measure ● services in the
including labor costs and of economic activity, and can be ○ health sector
infrastructure (roads, airports, ports, used to calculate GDP after certain ○ education sector
etc.) adjustments are made. ○ finance sector, etc.
,Net exports (X-M) = This approach allows comparisons of
exports (X) - imports (M): All spending This approach allows comparisons of the relative contribution of each
by foreigners to buy exports minus all the sector to GDP
spending by domestic consumers to relative income shares of factors of
buy imports production
(ex labor's share) and contributions
C +I+G + X-M =GDP, where GDP Is a of these to
measure of economic activity. national income (and hence to GDP).
This approach allows comparisons of
the relative contribution of C, I, G, and
X -M to GDP.
NOMINAL VS REAL VALUES TOTAL VS PER CAPITA VALUES
Nominal: measures of output and income in terms of Total GDP and GNI provide an indication of the size of an
current prices (prices prevailing at any given economy.
moment).
Per capita GDP provides an indication of the amount of output
Real: are measures of output and income in terms of corresponding to each person in the population on average.
constant prices that prevail in one particular year;
therefore real values eliminate the influence of price Per capita GNI provides an indication of how much income is
level changes over time. (adjusted for inflation) received by each person in the population on average and is
therefore a better indicator of standards of living.
✵ Real values must always be used to make
comparisons over time, in order to get a more Per capita → useful as a summary measure of the standard of
accurate picture of changes in output and income living in a country. (due to differing population sizes across
without the influence of price changes. countries and population growth)
REAL GDP/GNI PER CAPITA AT PURCHASING POWER PARITY (PPP)
● Purchasing power parity = special exchange rate that converts national currencies into
USD so that differing currencies are not affected by differences in price levels.
● Different countries have different price levels
● The same amount of money at a low-price country has greater purchasing power (can
buy more things) than in a high price country
● Therefore a method of currency conversions is needed that accounts for different price
levels
● Comparisons of GDP or GNI per capita is based on conversion of national currencies in
USD by the use of purchasing power parities to eliminate the influence of price
differences on the value of output/income.
, CALCULATIONS BASED ON NATIONAL INCOME ACCOUNTING
Calculating nominal GDP using the expenditure approach
GDP = C + I + G + (X - M)
GDP = 11.3 + 3.2 + 2.5 + 0.4 = 18.4 billion
Calculating GNI
GNI = GDP + (income from abroad - income sent
abroad)
Calculating nominal vs real GDP
Using the GDP deflator to
calculate real GDP
*Base year has a price deflator of 100
GDP deflator = price index that converts nominal
values to real
Calculating per capita values
Macroeconomics: studies the economy as a whole and its economic objectives
Circular Flow of Income of an Open Economy:
Leakages: TSM; Injections: GIX
OUTPUT = INCOME = EXPENDITURE
If Leakages > Injections = CFOI becomes smaller
If Leakages < Injections = CFOI becomes larger
● Government of UK imposes a sugar tax 2018
● An increase in taxes leads to an increase in the size of leakages
● When leakages > injections , slower economic growth
● consumers might be less confident about the economy and they will chose to spend less
● Firms will respond by decreasing the amount of goods and services in order to
● lose less revenue and match the decrease in the demand for their products
● Less Fops are consumed
● unemployment increases
● Income decreases and the size of the entire economy is reduced
● An increase in export revenue leads to an increase in the size of injections
● When injections > leakages, faster economic growth
● consumers are more confident about the economy and they will chose to spend more
● Firms will respond by increasing the amount of goods and services in order to lose less
revenue and match the increase in the demand for their products
● More Fops are consumed, unemployment decreases
, ● income increases and the entire economy grows
MEASURES OF ECONOMIC ACTIVITY
GDP vs GNI
GDP: The market value of all final goods and services GNI: the total income received by the residents of a
produced WITHIN a country over a time period, country in a year, regardless where the factors of
regardless of who owns the factors of production. production owned by the residents are located
GDP (the value of output) is likely to differ from GNI (income received by the residents of a country) because
income from FOP usually flows across international boundaries. Therefore income received may be greater or
less than the value of output produced:
Factor income received from abroad: Factor Income sent abroad:
● income received by domestic residents sent to ● wages of foreign workers working domestically
them by relatives working abroad (known as sent to their relatives back home (remittances)
remittances) ● profits of foreign multinational corporations
● profits of multinational corporations (also a operating domestically sent back to their
form of income) earned abroad and sent home country (profit repatriation)
home (known as profit repatriation)
✵ GDP is a better measure of the value of output produced by a country than GNI (GNP).
✵ GNI (GNP) is a better measure of the amount of income earned by the residents of a country.
** Measuring GDP by the Measuring GDP by the INCOME Measuring GDP by the OUTPUT
EXPENDITURE APPROACH: APPROACH: APPROACH:
Adds up all income earned by the
Adds up total spending to buy all final four factors of production in the Calculates the value of all final goods
goods and services within a year. course of producing total output and services produced in a country
There are four components within a year: over a time period.
of spending:
Rent earned by land The value of goods and services is
Consumption spending (C): All Wages earned by labor calculated for each sector in the
spending by consumers to buy goods Interest earned by capital economy, such as:
and services Profit earned by entrepreneurship
Investment spending (I): All spending ● goods in the agricultural
by firms to buy capital goods plus all Rent + wages + interest + profit = sector
private construction national income ● goods in the manufacturing
Government spending (G): All sector
spending by the government, National income is another measure ● services in the
including labor costs and of economic activity, and can be ○ health sector
infrastructure (roads, airports, ports, used to calculate GDP after certain ○ education sector
etc.) adjustments are made. ○ finance sector, etc.
,Net exports (X-M) = This approach allows comparisons of
exports (X) - imports (M): All spending This approach allows comparisons of the relative contribution of each
by foreigners to buy exports minus all the sector to GDP
spending by domestic consumers to relative income shares of factors of
buy imports production
(ex labor's share) and contributions
C +I+G + X-M =GDP, where GDP Is a of these to
measure of economic activity. national income (and hence to GDP).
This approach allows comparisons of
the relative contribution of C, I, G, and
X -M to GDP.
NOMINAL VS REAL VALUES TOTAL VS PER CAPITA VALUES
Nominal: measures of output and income in terms of Total GDP and GNI provide an indication of the size of an
current prices (prices prevailing at any given economy.
moment).
Per capita GDP provides an indication of the amount of output
Real: are measures of output and income in terms of corresponding to each person in the population on average.
constant prices that prevail in one particular year;
therefore real values eliminate the influence of price Per capita GNI provides an indication of how much income is
level changes over time. (adjusted for inflation) received by each person in the population on average and is
therefore a better indicator of standards of living.
✵ Real values must always be used to make
comparisons over time, in order to get a more Per capita → useful as a summary measure of the standard of
accurate picture of changes in output and income living in a country. (due to differing population sizes across
without the influence of price changes. countries and population growth)
REAL GDP/GNI PER CAPITA AT PURCHASING POWER PARITY (PPP)
● Purchasing power parity = special exchange rate that converts national currencies into
USD so that differing currencies are not affected by differences in price levels.
● Different countries have different price levels
● The same amount of money at a low-price country has greater purchasing power (can
buy more things) than in a high price country
● Therefore a method of currency conversions is needed that accounts for different price
levels
● Comparisons of GDP or GNI per capita is based on conversion of national currencies in
USD by the use of purchasing power parities to eliminate the influence of price
differences on the value of output/income.
, CALCULATIONS BASED ON NATIONAL INCOME ACCOUNTING
Calculating nominal GDP using the expenditure approach
GDP = C + I + G + (X - M)
GDP = 11.3 + 3.2 + 2.5 + 0.4 = 18.4 billion
Calculating GNI
GNI = GDP + (income from abroad - income sent
abroad)
Calculating nominal vs real GDP
Using the GDP deflator to
calculate real GDP
*Base year has a price deflator of 100
GDP deflator = price index that converts nominal
values to real
Calculating per capita values
