3.1 Measures of Economics

• Gross Domestic Product (GDP)


  The total value of all final goods and services produced within a country over a time period (usually a year), regardless of who owns the factors of production
• GDP formula components


  • C
  • I
  • G
  • (X-M)
• C


  Consumption spending - All household purchases of final goods and services in a year
• I


  Investment - Spending by firms on capital
• G


  Government - All government expenditure on goods and services. It does not include transfer payments
• (X-M)


  Net Exports - (exports - imports) Net exports represent the total value of exports minus imports
• What isn’t included in GDP

  • Intermediate goods
  • Non-product transactions
  • Financial transactions
  • Used goods
  • Transfer payments
  • Non-market activities
• Gross National Income (GNI)


  The total revenue income received by the residents of a country is equal to the value of all final goods and services produced by the factors of production supplied by the country’s residents regardless of where the factors are located
• Gross National Income


  Is Gross Domestic Product plus net income from abroad
• Remittances


  Funds that migrants send back to their home countries
• Many workers in Lesotho work in South African mines and send (remit) income home
• Profit Repatriation


  The ability of a firm to send foreign-earned profits or financial assets back to the firm’s home currency after meeting the host’s tax obligations
• Real Gross Domestic Product

  Gross Domestic Product adjusted for inflation over time
• GDP in today’s prices

  Nominal GDP
• GDP in constant prices

  Real GDP
• GDP Deflator


  A price index that allows us to calculate real GDP from nominal GDP. It shows how much inflation has increased from the base year
• Calculating Real GDP


  Real GDP = Nominal GDP / GDP deflator * 100
• The Business Cycle


  Represents the short-term fluctuation of real GDP around its long-term trend or potential output
• Full employment of output


  The level of output that is produced by the economy when there is only natural unemployment
• Potential Output


  The level of output reached when the economy is at the full employment level of output
• Phases of the Business Cycle

  • Expansion (Recovery)
  • Peak
  • Contraction (recession)
  • Trough
• Expansion (Recovery)


  Represents a growing economy, rising employment of resources, rising price level; Spring
• Peak


  Represents maximum real GDP, unemployment of resources has fallen substantially, price level rising rapidly; Summer
• Contraction (recession)


  This represents a shrinking economy (two quarters or more is a recession), growing unemployment of resources, and the price level rising very slowly or falling; Autumn
• Trough


  Represents the minimum real GDP, price level rises very slowly or falls; Winter
• The PPC curve expands and deflates during the Business Cycle
• Expansions usually last longer than contractions
• There is a correlation between employment and real GDP