This summary consists of the following 6 topics. measuring income and living standards; measuring the aggregate economy; the multiplier model; fiscal policy; banks, money and the central bank; long-term economic growth.
Which are each structured through the learning objectives.
The CORE econ...
1. Measuring income and living standards
Week 1- unit 1.1 – 1.3
Real GDP per capita or disposable income are commonly used measures for living standards.
Measuring living standards is important for economic policy since these can effect various factors of a
population, including happiness and productivity. Which is important because the higher productivity and
happiness levels stand, the better off an economy tends to be as a whole.
Article included week 1: file:///C:/Users/jamie/Downloads/How%20Should%20We%20Measure%20the%20Digital%20Economy_.pdf
1.1 Discuss several measures of living standards and wellbeing
Real GDP per capita
The generally agreed upon measure for standard of living is the real GDP per capita of a country, since GDP
per capita increases when the overall productivity increases.
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a
country during a period of time, usually one year. It includes only the production that takes place during the
indicated time period.
➢ Final good or service is a good or service purchased by a final user.
➢ Intermediate good or service is a good or service that is an input into another good or service.
GDP is a measure of total income and output created within the borders of a country in a given period.
This is usually expressed in per-capita terms.
It seeks to measure the average economic output of each resident in a country and it can be calculated as
follows.
Real GDP per capita = (nominal GDP/(1+deflator*))/population
Real GDP per capita = real GDP / population
*Deflator refers to the change in the value of the currency between the years you’re comparing.
GNP
Gross national product (GNP) is a measure of total income and output of the residents of a country in a
given period. It also includes all companies that are located in the Netherlands, minus the parts of profit
which is send back to the country of the companies headquarters. GNP = GDP + net primary incomes
received from abroad.
Disposable income
GDP per capita measures the average income, but not the disposable income of a typical person.
➢ Disposable income is total income – taxes + government transfers. Is used to see what a person
or family can actually spend.
GDP versus disposable income as measuring tool for the following topics
Average well being: Average disposable income fail to reflect the average wellbeing of a group of people
in comparison to other groups. Since a group combines multiple individuals who may or may not have the
same income.
Valuing government goods and services: GDP includes the goods and services produced by the
government, which are not included in disposable income even though they contribute to wellbeing. In this
situation, GDP per capita is a better measure tool of living standards
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, Business Economics
1.2 Explain the difference between nominal and real GDP
Nominal GDP is a macroeconomic assessment of the value of goods and services using current prices in its
measures. Whereas real GDP takes consideration of adjustments for changes in inflation.
In other words, nominal GDP measures output using current prices and real GDP measures output
using constant prices.
Real GDP
Is the value of final goods and services evaluated at base-year prices. Real GDP makes it possible to
exclude the yearly changes in the price levels.
Nominal GDP
Is the value of final goods and services evaluated at current-year prices.
(Price of service1) x (number of services) + (price of a product1) x (number of products) +….. + (price) x
(quantity) for all other goods and services.
➔ Nominal GDP=∑𝑖𝑝𝑖𝑞𝑖
Pi is the price of good i. Qi is the quantity of good i. and E indicates the sum of price times quantity for all
the goods and services that we count.
1.3 Compare living standards across time and across countries
Taking account of price differences among countries: International prices and purchasing power
Purchasing Power Parity (PPP) is a statistical correction allowing comparison of the amount of goods
people can buy in different countries that have different currencies.
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, Business Economics
2. Measuring the aggregate economy
Week 2 – unit 13.1-13.4 13.8 9.2
Business cycle is alternating periods of positive and negative growth rates. It shows a country’s short-
term economic growth, or real GDP from year to year.
During Expansionary phases, the growth rate of GDP increases
year after year
Peak = highest, Trough = lowest
During Contractionary phases the growth rate of GDP declines
year after year.
Recession is a period when output is declining or below its potential level.
Economic fluctuations are changes in national income and economic growth. These fluctuations are
quantified by measuring changes in macroeconomic factors such as national income, unemployment and
gross domestic product.
It is necessary to differentiate between the following two kinds of fluctuations. Regular and cyclical.
These two types of fluctuations refer to different periods of growth or decrease that occur over time,
respecting a pattern.
Irregular fluctuations doesn’t obey foreseeable changes and they occur due to different external effects.
Every nation’s economy fluctuates between periods of expansion and contraction. These changes are
caused by levels of employment, productivity and the total demand for supply of the nation’s goods and
services. In the short-run, these changes lead to periods of expansion and recession.
An alternative definition says that an economy is in recession during a period when the level of output is
below its normal level. Therefore, we have the following two definitions of recessions.
➢ NBER suggests that output is declining. A recession is over once the economy begins to grow again.
➢ Alternative definition: the level of output is below its normal even, even if the economy is
growing. A recession is not over until output has grown enough to get back to normal.
Okun’s law
Okun’s law is an empirically observed relationship between unemployment and losses in a country’s
production. It predicts that a 1% increase in unemployment will usually be associated with a 2% drop in
gross domestic products (GDP).
The amount of output that an economy produces depends on the amount of labour in the production
process; when there is more labour involved in the production process, there is more output (vice versa).
This empirical regularity is typically expressed as a negative linear association between the cyclical
component of the unemployment rate and the output gap.
In other words, it shows a strong and stable relationship between unemployment and GDP growth.
Changes in the GDP growth rate are negatively correlated with the unemployment rate.
Okun’s coefficient is a number that represents the expected change in unemployment associated with a
1% increase in GDP.
U=a+bxG
U – change in the unemployment rate between one quarter and the next.
G – growth in real GDP for that quarter.
B – Okun’s coefficient (slope of the relationship between GDP growth and unemployment.
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