Measuring Economic Activity and GDP

Measuring Economic Activity

• National income accounting is used to gauge a nation's economic activity level.
• Economic activity has three equivalent measurements expressed in monetary terms: total expenditure, total income, and total output of goods and services.
• Nominal GDP measures the value of all final goods and services produced in an economy within one year, using current price levels.
• Nominal GDP is calculated as Consumption + Investment + Government Spending + (Exports – Imports), or C + I + G + (X – M).
• National Expenditure equals National Income plus National Output.
• Total expenditure from all stakeholders equals the total income generated by households, which equals the total output produced by firms.

Circular Flow of Income

• An injection refers to additional money added to the circular flow of income.
• A leakage refers to a withdrawal of money from the circular flow of income.
• If injections exceed leakages in the circular flow, national income increases.
• If leakages exceed injections in the circular flow, national income decreases.

Real GDP and Real GNI

• Real GDP and real GNI are economic activity measures calculated using constant prices, adjusted for price level changes over time.
• Nominal GDP and nominal GNI are measured using current prices, and are not adjusted for changes in price levels over time.
• An increase in nominal GDP may indicate increased output, however the rise may also be due to inflation.
• Real GDP and real GNI are more accurate measures for comparing economic activity.
• Real GDP is adjusted for changes in price levels over time, usually from a base year.
• Nominal GDP is not adjusted for changes in price levels over time.
• Purchasing power refers to the amount of goods and services purchasable with one unit of currency.

Aggregate Demand and Supply

• Aggregate demand (AD) is the total demand for all goods and services in an economy by all stakeholders at different price levels over a time period.
• Aggregate supply refers to the total value of goods and services produced in an economy at different price levels over a time period.
• The Monetarist model separates aggregate supply into short run aggregate supply (SRAS) and long run aggregate supply (LRAS).

Automatic Adjustment to Full Employment Equilibrium

• In the short run, there may be inflationary or deflationary gaps in the New Classical Model; these are always temporary.
• Market forces will eventually restore the economy back to the long run equilibrium at the level of potential output.
• When YP shifts to Y2, there is higher CGIMX/government expenditure.
• When YP shifts left to Y2, there is a higher cost of production.

Macroeconomic Objectives: Low Unemployment

• Employment refers to the use of factors of production in the production process, usually applied on labor resources.
• Unemployment refers to people who are willing and able to work and are actively seeking work, but cannot find work at the current wage rate.
• Unemployment means that resources are not being fully utilized in the economy.
• A higher employment rate results in greater national income and expenditure, increasing economic well-being and standards of living.
• Higher employment leads to greater tax revenue from indirect taxes, such as custom duties, sales taxes, and VAT, and direct taxes, such as income and corporate taxes.
• Higher employment provides a lower financial burden on the government to support unemployed individuals.

Cyclical Unemployment

• Cyclical unemployment (demand-deficient unemployment) occurs when the demand for goods and services falls across industries during a recession, decreasing the demand for labor.
• Cyclical unemployment leads to job losses as firms cut costs and prevent business failure during recessions.

Structural Unemployment

• Structural unemployment equals natural unemployment.
• Structural unemployment is caused by sector or the structure of the economy.
• A mismatch between available jobs and the skills that workers can offer is another cause of structural unemployment.
• Labor market rigidities, such as minimum wage legislations, trade union powers, and generous unemployment benefits, are other causes of structural unemployment.

Impacts of Unemployment

• Economic costs of unemployment include:
  • Loss of GDP, resulting in negative economic growth, lower international competitiveness, and lower potential output due to inefficient use of scarce resources.
  • Loss of tax revenues due to lower income and expenditure.
  • Loss of income for individuals, leading to lower household income for families.
  • Increased costs of unemployment benefits, increasing national debts.
  • Greater disparities in the distribution of income, as certain groups suffer from more prolonged periods of unemployment.