Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
   1. Overall economic activity - introduction
   2. The circular flow of income model (1)
   3. Circular flow - two sector closed
   4. Circular flow - two sector open
   5. Circular flow - three sector open
   6. Circular flow - government
   7. The circular flow of income model (2)
   8. Circular flow - a summary
   9. Some mathematics
   10. Measures of economic activity
   11. Examining the three methods of calculating national income
   12. What is GDP? (video)
   13. Different national income measures
   14. Real v money data
   15. Current and constant prices
   16. Using index numbers
   17. Total and per capita
   18. Case study - rapid economic growth
   19. Using national income data
   20. Purchasing power of GDP
   21. Alternative measures of GDP
   22. Case Study
   23. Short term fluctuations and long term trends
   24. The business cycle in history
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

Investigating the three methods of calculating national income (GDP/GNP)

A government can calculate the level of economic activity by trying to measure:

• the total amount of output produced (the output method), or
  
• the income generated from producing it (the income method), or
  
• the total expenditure on purchasing it (the expenditure method).
  

Governments calculate how much output, income, and expenditure takes place in the economy in one year.

Syllabus says: You need to be able to Distinguish between GDP and GNP/GNI as measures of economic activity.

NB GNP and GNI are identically the same thing so the terms can be used interchangeably

So GDP definition: Gross Domestic Product is a measure of everything produced by an economy within the economy

And GNP/GNI is a measure of everything produced by an economy within the economy (GDP) PLUS everything produced by an economy outside the economy

You need to be able to:

Distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI.

Remember: Nominal is to do with money flows and real is to do with physical things

You need to be able to:

Distinguish between total GDP and GNP/GNI and per capita GDP and GNP/GNI.

If country A had a total GDP of $1000 and country B had a total GDP of $1500 can we make a valid conclusion as to which country is doing best?

However, in practice a number of difficulties arise when trying to accurately calculate income, output and expenditure.

These difficulties include:

• The unofficial, shadow or informal economy - in which the output is not declared. This is because some producers do not want to pay tax or may be involved in illegal operations. If we look at the expenditure and income methods of measuring national income, we can get some idea of how much undeclared work might be happening. Some of us will be spending income we have not declared! Whatever the scale of this shadow economy, it means that a part of the GDP is understated. The size of the unofficial economy will vary from country to country.

• 
• Non-marketed goods and services - some transactions do not involve money changing hands. For example, people undertaking voluntary work or helping decorate a friend's house does not appear as earned income, but it can be argued to be part of the production of the economy. Similarly, in less developed countries, much economic activity is part of the subsistence economy in which people grow/make things for themselves and the goods are not sold for money in markets. It has been argued passionately by some that women who stay at home to look after children should have this service valued and included in national income.

• Government spending - in the expenditure method of calculating national expenditure, government spending on goods and services is included. However, some government expenditure goes to producing public goods, for example defence, which are not sold. So there is a problem in ascribing an appropriate value to these goods for national income calculation.