13/01/16
Lesson 2: GNI, stats and the business cycle
Learning Objective: I can explain each segment of the business cycle.
DA: List the formula which makes up the GDP statistic.
DA: List the formula which makes up the GDP statistic.
GDP = Total economic activity in a country, regardless of who owns the productive assets.
- ex. a Venezuelan company is operating in the USA, then this income is included in USA's GDP.
GNI (Gross National Income) = GDP + net property income from abroad.
- GNI equals GDP plus income earned from assets abroad minus income paid to foreign assets operating domestically.
NNI (Net National Income) = GNI - depreciation
- While NNI gives a more realistic view of the real economic activity of a country, in practice it is very difficult to account for depreciation.
Nominal GDP vs. Real GDP
- It's important to take into account an increase in the price of goods/services (inflation). Whenever you see the adjective "real" in front of an economic variable, it means that the variable has been adjusted for inflation.
- Real GDP = Nominal GDP adjusted for inflation
HL:
GDP per capita = Total GDP divided by the size of the population.
- Important statistic to assess the living standards of a particular country.
Why are national income statistics gathered?
- National income stats can be seen as a "report card". People use the stats to judge whether or not a government has been successfully achieving its macro objective of increased growth.
- Gov use stats to develop policies and forecasts about the future.
- Businesses use stats to make forecasts about future demand.
- National income is equated with rising living standards and comparing other countries.
- Inaccuracies: The United Nations SNA (System of National Accounts) works with all countries to improve the methods of gathering data.
- Unrecorded or under-recorded economic activity---informal markets, hidden economy: households or the blackmarket; drug trafficking and tax evasion. All lead to an underestimation of the economy.
- External costs: GDP does not take into account resource depletion; negative externalities.
- Other quality of life concerns: Increased GDP doesn't necessarily equate to a high standard of living. GDP does not calculate for humanitarian work which can lead to a better society.
Green GDP = GDP - environmental costs of production
Read the article below and answer the following question: How does the issue highlight the importance of valuing natural resources in national income accounts?
The Business Cycle:
Recovery:
- Economic expansion, increasing GDP.
- Increased aggregate demand, households/businesses are encouraged to spend more.
- Output increases, unemployment falls, and spending increases.
- Increase in AD leads to increase in the average price level.
- Inflationary pressure will build up and GDP growth will fall as the economy nears its potential output.
- Economic policy makers are likely to act by trying to slow the economy.
- Defined as two consecutive quarters of negative GDP growth, falling GDP. Not to be confused with a decrease in GDP growth.
- Falling AD leads will lead firms to lay off workers, unemployment rises, less spending.
- Low levels of demand result in lower rates of inflation.
- Output cannot continue to fall for ever as there will always be some people with jobs to maintain consumption.
- Foreigners will demand exports and people will use their saving to finance consumption.
- Interest rates will decrease to fuel a recovery.
Activity: