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1. Economic growth
★ Increase in national output
2. Employment
★ A low level of unemployment
3. Price stability
★ A low and stable rate of inflation
4. External stability
★ Favourable balance of payments
5. Income distribution and levels of poverty - Equity in the distribution of income
6. Sustainable level of govt debt
Total economic output = national income = GDP (gross domestic product)
Factors of production and the payment for each one:
1. Labour = wages
2. Land = rent
3. Capital = interest
4. Management/Entrepreneurship = profits
2 sector circular flow of income model
Measure national income
,The most common method is Gross Domestic Product (GDP)
3 methods can be used to calculate it:
1. Output method - the actual value of goods and services produced
➔ Grouped according to the different production sectors
2. Income method - the value of all incomes earned in the economy
3. Expenditure method - the value of spending on goods and services in the economy.
C + I + G + (X-M)
C = Consumption = spending by households on final goods and services
I = Investment = spending by firms on capital goods and new construction
G = Government = spending by governments and includes govt investment
X = Net exports = income earned by selling exports minus income spent on imports
GDP: the total value of all final goods and services produced in an economy in a year.
4 sector circular flow of income model
Leakages and injections
, ➔ Saving: foregoing current consumption to allow for consumption in the future.
➔ Saving is a leakage as it is income received that is not spent on goods/services.
➔ Leakages reduce the size of income in the circular flow
➔ Firms have access to savings of households by borrowing money from banks.
➔ This money can be spent on increasing stock of capital and therefore output.
➔ This is investment and is an injection into the circular flow.
➔ Injections increase the size of income in the circular flow.
Difference between GDP and GNP/GNI
GDP: the total of all economic activity in a country (irrespective of who owns the productive
assets)
GNP/GNI: the total of all income that is earned by a country’s factors of production (regardless
of where the assets are located)
Net property income from abroad
Property income from abroad (Income from assets held in foreign countries)
-
Income paid to foreign assets
=
Net Property Income from abroad
GNP/GNI
➔ GNI = GDP + net property income from abroad
NNI: Net national income
➔ A country’s capital stock (infrastructure and machinery) loses some of its value over a
year.
◆ depreciation
➔ GDP does not take account of depreciation but NNI does
◆ NNI = GNI - depreciation
Difficult to estimate depreciation of a country’s assets, typically estimated at 10%
Nominal and Real GDP
, What is the percentage growth in GDP between the 2 years?
But we haven’t taken account of inflation.
If inflation is 5%, what happens?
$110 bn x 100/105 -> Real GDP = $104.76bn
Year Nominal GDP
2018 100$ billion
2019 110$ billion
Why is this data collected?
➔ To assess the level of economic growth. Acts as a report card.
➔ Helps in developing and applying policies
➔ Economists make predictions about the future
➔ Businesses can forecast future demand
➔ Analyse performance over time
➔ Can be used to evaluate the quality of life in a country
➔ Comparing different countries
Limitations of the data
Inaccuracies:
- huge range of sources are used
- Time lag
- Developed countries have pretty reliable systems
Unrecorded activity:
- Not all activity is recorded. Doing DIY at home
- Not a factor in developed countries.
Hidden economy:
- Income from illegal sources e.g. drug trafficking
- Illegal immigrants working in the black economy
- Tax evasion and the role of high taxes
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