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Measuring Economic Activity
It is also called
NATIONAL
INCOME
ACCOUNTING.
Measuring
Economic
Activity
Economy’s output is
also called
AGGREGATE OUTPUT.
AGGREGATE OUTPUT/ NATIONAL INCOME
There are three approaches to measuring aggregate
output or national income.
•Output Approach – How many goods and services are produced. (value of
final goods and services)
•Income Approach – How much income is generated.
•Expenditure Approach – what everyone spends in the economy.
The 3 approaches are equivalent in nature.
OUTPUT APPROACH = INCOME APPROACH = EXPENDITURE APPROACH
Exceptions:
•Measurement Errors
•Lack of recording
A closer look at the
VALUE OF OUTPUT APPROACH
• What producers produce in 1 year.
• The VALUE OF OUTPUT approach measures the
value of each good and service produced in the
country over a period of time (a year) and then
adds them up to get the TOTAL VALUE OF OUTPUT
PRODUCED.
Value of Output (Agriculture) +
VALUE OF OUTPUT = Value of Output (Banking) +
Value of Output (Transport) +
etc.
A closer look at the
INCOME APPROACH
The INCOME approach adds up all the income earned
by the factors of production in the country over a
period of time (a year).
TOTAL WAGES +
TOTAL RENT +
NATIONAL INCOME =
TOTAL INTEREST+
TOTAL PROFITS
A closer look at the
EXPENDITURE APPROACH
Consumption
(C)
Investment
(I)
Government
Spending
(G)
Net Exports
(X-M)
The EXPENDITURE approach
measures the total amount of
spending (or expenditure) to
buy goods and services in a
country.
GDP
Gross Domestic
Product
E = C+I+G+(X-M)
GDP
GDP or Gross Domestic Product is a measure of
output produced in a country during a given
period of time.
DEFINITION – GDP is the market value of all
the final goods and services produced in a
country over a period of time (usually a year).
It includes:
•spending by households called Consumption (C ),
•spending by firms called Investment (I),
•spending by government called Govt. Spending (G)
•spending by foreigners on exports – spending on
imports called Net Exports (X-M)