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ECON Measurements of The Economy

The document outlines key economic concepts including Gross Domestic Product (GDP), unemployment rate, inflation, and Gross National Income (GNI). It details methods for calculating GDP, types of unemployment, inflation effects, and the implications of GNI. Additionally, it highlights the limitations and challenges associated with these economic indicators.

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yimclementcly0102
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9 views4 pages

ECON Measurements of The Economy

The document outlines key economic concepts including Gross Domestic Product (GDP), unemployment rate, inflation, and Gross National Income (GNI). It details methods for calculating GDP, types of unemployment, inflation effects, and the implications of GNI. Additionally, it highlights the limitations and challenges associated with these economic indicators.

Uploaded by

yimclementcly0102
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Gross Domestic Product

- Dollar value of all final goods and services produced within a


country’s borders in one year
- Output method:
o Adding the value of all final goods and services produced
o Excluding:
 Intermediate goods (tires in a car)
 Non-production transactions (bonds)
 Goods produced in foreign countries
 Non-market goods (household production)
 Illegal activities (drugs)
- Expenditure method:
o Adding up all spending on final goods and services produced
in a year
o GDP = C + I + G + (X-M)
o GDP = consumption + gross investments + government
spending + (exports – imports)
- Factor income method:
o Adding up all income of households
o Same as expenditure due to the circular flow of income
o Income = R + W + ir + PR
o Income = rent + wages + interest + profit (payments of FoP)
- Other types of GDP:
o Nominal GDP: GDP not adjusted for inflation
o Real GDP: GDP adjusted for inflation (prices in the base year
are adopted in the calculation of GDP of other years and
hence is constant)
o Green GDP = GDP minus environmental degradation and
negative environment externalities
o National Domestic Product = GDP – depreciation (investments
on replacing worn out capital goods) = C + I n + G + (X-M); In =
net investments (investments made to produce additional
capital goods; gross investments – depreciation)
o GDP per capita = GDP/population
- Problems with GDP
o Foreign direct investments are included, but the profit are
repatriated back to foreign countries
o People work in foreign countries and send back income to
their home countries, but the remittances are not included
o GDP does not reflect income equality and qualities of other life
aspects, e.g. gender equality and freedom
Unemployment Rate

- Unemployment: workers that are able and willing to work, and are
actively finding a job
- Unemployment rate: percentage of unemployed people in the labor
force
- Labor force:
o Able and willing to work
o Aged 16 or above
o Not institutionalized (prisoners, sick people)
o Civilians (non-military)
o Not retired or in school full-time
- Frictional unemployment
o Temporary unemployed
o Individuals are qualified with transferable skills
o E.g. postgraduates
o Seasonal unemployment – unemployment due to time of year
and nature of the job
o Always present
- Structural unemployment
o Skills of individuals are obsolete and no longer transferable
o Workers must learn new skills
o E.g. lumberjacks
o Technological unemployment – workers are replaced by
automation
o Always present
- Cyclical unemployment
o Unemployment caused by economic recession
o Exists as a cycle
o Workers are fired because as demand falls, workers’ income
decreases, demand decreases
- Natural rate of unemployment
o Frictional plus structural employment
o The unemployment rate in a healthy economy with no cyclical
unemployment (full employment)

Inflation

- Rising general level of prices


- Reduces purchasing power of a currency
- Uncontrolled inflation: people save less as they anticipate prices to
rise, investments and GDP decreases
- Deflation: decrease in general prices, people save money as they
expect prices to fall
- Disinflation: increase in general prices at a slower rate
- People hurt by unanticipated inflation
o Lenders (fixed interest rates)
o People with fixed incomes
o Savers
- People benefitting from unanticipated inflation
o Borrowers
o Businesses where the price of the product increases faster
than the price of resources
- Nominal wage: wage not adjusted to inflation
- Real wage: wage adjusted to inflation
- Inflation rate: percentage change in prices of a market basket
- Price indices: index numbers assigned to each year that show how
prices of a market basket change relative to a base year
- Consumer price index:
o Base year = 100
o CPI = (current price of market basket/price of market basket in
base year) x 100
o Limitations
 Substitution bias
 People stop buying a good when its price
increases
 Inflation reflected by CPI is exaggerated
 New products
 Some products are not included in certain market
baskets
 The increase in choice is not reflected in CPI
 Product quality
 CPI ignores improvements and declines in product
quality
 Economic wellbeing may have improved
- GDP deflator
o Measures the price of all goods produced
o GDP deflator = (nominal GDP/real GDP) x 100
- Causes of inflation
o Quantity theory
 People re-spend money
 Velocity: average times a dollar is spent and re-spent in
a year
 MxV=PxY
 Money supply x velocity = price x output quantity (real
GDP)
 P x Y = nominal GDP
 Price increases when money supply increases (assuming
output quantity and velocity remain constant)
 Hyperinflation is caused when governments print too
much money to pay off debts
o Demand-pull inflation
 Excessive spending leads to an increase in prices
 Increase in demand
o Cost-push inflation
 Negative supply shocks increase costs of production and
prices
 Decrease in supply

Gross National Income

- Total income earned by a nation’s factors of production regardless of


location (can be foreign)
- GNI = GDP + net factor income
- Net factor income = income earned by domestic workers (regardless
of location) - income earned by foreign workers in the country

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