1. The difference between nominal & real values
1.1. INFLATION (price level increasing) increases the monetary value of GDP but the REAL value of goods and services produced may not have changed or even decreased.
1.2. ∆%Real GDP = ∆% Nominal GDP minus ∆% change in the price level index
1.3. Real GDP is GDP at constant prices, GDP for changes in the Price level
1.3.1. Using index numbers to calculate changes in the price level
1.3.1.1. A base year (or first year) is a starting year used to compare changes over time. The index always equals 1000 for the base year.
1.3.1.2. If the price level index increases, this is called inflation
1.3.1.3. If the price level index decreases, this is called deflation
1.3.1.4. If the price level index increases at decreasing rate (2% - 1%) this is called disinflation
1.3.2. Weighted Consumer price index
1.3.2.1. Any change in the price of more important items of spending will be multiplied by a larger number in order to reflect its greater impact on consumer’s real incomes
1.3.2.2. Therefore the index is calculated using “weights” in order to show the effect on consumers’ incomes of each price increase.
1.3.3. To calculate Real GDP, we must know how much the price level is changing. This is done using an PRICE INDEX. The most common price index is Consumer Price Index (CPI)
1.3.3.1. REAL value= (Nominal Value/Current price level) x100
1.4. Nominal GDP is GDP at current (today’s) prices
2. Calculating GDP using the income and expenditure approaches
2.1. Income method
2.1.1. TOTAL payments for using resources should equal purchases.
2.1.2. GDP= W+ P+ (IT–S)
2.1.2.1. Wages = Compensation of Employees (before income tax)
2.1.2.2. Profit = Gross Operating Surplus (before income tax)
2.1.2.3. Net Indirect Tax = Indirect tax - subsidies
2.2. Each method should give the same result
2.3. Expenditure method
2.3.1. TOTAL purchases of goods & services
2.3.2. GDP=C+∆R +I +G + (X-M) +St
2.3.2.1. C = Final Consumption Expenditure (Private)
2.3.2.2. ∆R = Change in Stock
2.3.2.3. I = Gross Fixed Capital Formation (Investment)
2.3.2.4. G = Final Consumption Expenditure of Government X-M = Net Exports
2.3.2.5. St = Statistical Error (or discrepancy)
2.4. To be recorded in the calculation of GDP, the transaction must be recorded as a payment or receipt. If no money changes hands or the transaction is not recorded, GDP will omit these amounts from the calculation of GDP.
2.4.1. Problem of ‘NON-MARKET’ activities are NOT included in the calculation of GDP
2.4.1.1. Lack of information – where GDP data difficult to collect or there are illegal (Black or Grey markets) where the government has no record of the trading.
3. Using RGDP to measure the standard of living and make international comparisons
4. Economic Growth
4.1. %∆Real GDP = (Real GDP Year 2 – Real GDP Year 1)/ Real GDP Year 1 x100 = ___%
4.1.1. Real Gross Domestic Product (RGDP)
4.1.1.1. RGDP measures the total value (adjusted for changes in the price level) of goods and services produced in a country for one year, which is divided into quarters.
4.2. Below zero = negative growth rate At least 6 months = [2 quarters] is called a RECESSION
4.3. Gross Domestic Product (GDP)
4.3.1. GDP measures economic growth
4.3.2. The total value of goods and services produced in a country in one year, which is divided into quarters
4.3.3. Calculating GDP – CLOSED economy with only households & firms
4.3.3.1. Resources are provided by households to firms who pay incomes.
4.3.3.2. The households can then buy goods and services that are produced by firms
4.3.3.3. If these were the only sectors of the economy, household income earned from supplying resources would be
4.3.3.4. spent on the goods and services produced; i.e. that would be the value of GDP.
4.3.3.5. However the economy is divided into more than these two sectors but even when flows of income are recorded as
4.3.3.6. flowing through these other sectors, economists can still use this fundamental idea, that all income will eventually be spent to calculate GDP.
4.3.3.7. A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide consumers with everything they need from within the economy's borders. A closed economy is the opposite of an open economy, in which a country conducts trade with outside regions.
4.3.4. Changes in GDP
4.3.4.1. GDP remains in equilibrium as long as this is true.
4.3.4.2. f I > W, GDP will increase If I < W, GDP will decrease
4.3.4.2.1. Problems/limitations of GDP as an accurate measure of economic activitiy
4.3.4.3. I + G + X = S + T + M Injections = Withdrawals
4.3.4.3.1. I=Investment
4.3.4.3.2. G=Government spending
4.3.4.3.3. X=Export Receipts
4.3.4.3.4. S=Saving
4.3.4.3.5. T=Taxation
4.3.4.3.6. M=Import Payments
5. Growth & Circular Flow Matrix
6. Productivity & Growth
7. Introductions
7.1. Government, markets and society (GMS) examines how the government plays a vital role in helping markets maximise the economic welfare of its citizens.
7.2. Economics is based on two assumptions: human wants are unlimited and secondly, the resources that make the goods and services to satisfy those wants are limited in supply.
7.2.1. Macroeconomic examines the whole economy’s performance
7.2.2. Microeconomic studies how markets allocate these scarce resources to satisfy people’s wants.
7.2.2.1. How consumers make choices about how to maximise their satisfaction (or welfare)
7.2.2.2. How business organise the resources to maximise their profit (or welfare).