3.1 National Income yas

• Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period, usually a year. It is a key indicator of economic activity and is used to gauge the health of an economy.
• Methods of Calculation for GDP

  1. Expenditure Approach: GDP=C+I+G+(X−M)
  2. Income Approach: GDP=W+R+I+P+T−S
  3. Production (Output) Approach: GDP=∑(Value of Output−Value of Intermediate Consumption
• Real vs Nominal GDP

  • Nominal GDP: Measures the value of all finished goods and services produced within a country's borders in a specific period using current prices.
  • Real GDP: Adjusts nominal GDP for inflation to reflect the true value of goods and services in constant prices.
• GDP per capita is the GDP divided by the population. It provides an average economic output per person and is often used to compare the economic performance of different countries.
• Gross National Income (GNI) includes the total domestic and foreign output claimed by residents of a country. It is calculated as:

  GNI=GDP+Net Income from Abroad
• Net National Income (NNI) adjusts GNI by subtracting depreciation (the value of capital that has been used up or become obsolete).

  NNI=GNI−Depreciation
• Limitations of GDP

  1. Non-Market Transactions: GDP does not account for non-market transactions such as household labor and volunteer work.
  2. Informal Economy: GDP often underestimates economic activity in the informal economy.
  3. Quality of Life: GDP does not measure the quality of life or happiness of citizens.
  4. Environmental Impact: GDP does not account for environmental degradation.
• The Circular Flow of Income model is a fundamental concept in macroeconomics that illustrates how money moves through an economy. It shows the interdependencies between different economic agents and helps us understand how various sectors of the economy interact with one another.
• The Simple Circular Flow of Income Model has two key components:

  1. Households: Own the factors of production (land, labor, capital, and entrepreneurship) and supply these to firms.
  2. Firms: Hire factors of production from households to produce goods and services.
• The flow of income in the simple model occurs through:

  1. Factor Markets: Households supply factors of production to firms and earn rent, wages, interest, and profit.
  2. Goods and Services Markets: Firms produce goods and services, which households purchase using their earned income.
• The Complex Circular Flow of Income Model includes additional components:

  1. Government: Collects taxes and provides public goods and services.
  2. Financial Sector: Facilitates savings and investments.
  3. Foreign Sector: Engages in exports and imports.
• The Complex model introduces the concepts of leakages and injections:

  • Leakages: Outflows that remove money from the circular flow (Savings, Taxes, Imports)
  • Injections: Inflows that add money to the circular flow (Investment, Government Spending, Exports)
• The impact of injections and leakages on the economy:

  • Injections > Withdrawals: Leads to economic growth
  • Withdrawals > Injections: Leads to a fall in real GDP
• Criticisms of the Circular Flow of Income Model:

  1. Focuses primarily on money flows, not accounting for well-being and environmental health.
  2. Does not consider the unsustainable use of raw materials and generation of waste and carbon emissions.
• A circular economy aims to:

  1. Eliminate waste and pollution
  2. Recirculate products
  3. Regenerate nature
• Short-term fluctuations, also known as economic cycles or business cycles, refer to the periodic ups and downs in economic activity within an economy. These cycles are characterized by four distinct phases: expansion, peak, contraction, and trough.
• Phases of the Business Cycle

  1. Expansion: Increasing economic activity, rising GDP, lower unemployment, and increasing consumer confidence.
  2. Peak: The point at which the economy is at its maximum output.
  3. Contraction: Also known as a recession, characterized by falling economic activity and rising unemployment.
  4. Trough: The lowest point of the cycle, where economic activity is at its minimum.
• Causes of Short-term Fluctuations

  • External Shocks: Events such as natural disasters, geopolitical tensions, or pandemics.
  • Monetary Policy: Central banks' influence through interest rates and money supply.
  • Fiscal Policy: Government spending and taxation policies.
• Long-term trends refer to the sustained upward or downward movement in economic activity over an extended period. These trends are generally driven by fundamental factors such as technological advancements, demographic changes, and institutional developments.
• Measuring Long-term Trends

  Long-term economic trends are often measured using indicators such as:

  • GDP Growth Rate: The annual percentage increase in the value of all goods and services produced in an economy.
  • Productivity Levels: The amount of output produced per unit of input, such as labor or capital.
  • Per Capita Income: The average income earned per person in a given area in a specified year.
• Interaction Between Short-term Fluctuations and Long-term Trends

  Hysteresis refers to the phenomenon where short-term economic shocks have long-lasting effects on the economy's potential output. For example, high unemployment during a recession can lead to a loss of skills and a decrease in the labor force's productivity, thereby reducing long-term economic growth.