1. Measuring Economic Activity It is also called NATIONAL INCOME ACCOUNTING. Why should we measure? - Observe a country’s performance over time. - Compare performance with other countries. Economy’s output is also called AGGREGATE OUTPUT. How is it measured? 1. INCOME APPROACH 2.OUTPUT APPROACH 3. EXPENDITURE APPROACH

2. GDP Vs. GNI Ms Sharon’s and Mr Nick’s company in Ningbo produces goods and services in China – these will be included in China’s GDP. From the profits of the company, every month, Mr Nick, her husband sends ¥25,000 back to his UK bank account. These will be included in UK’s GNI as income received from assets abroad. Real- life Focus Bailey’s father has a business in London and he moves there to run his business. His output will be included the UK’s GDP. From the profits of the company, Bailey’s father sends ¥ 100,000 every year back to his Bank of China account, so that Bailey’s tuition fees to MEA can be paid. This income will be included in China’s GNI as income received from assets abroad. If China’s GDP is ¥2,000,000, what it China’s GNI? Let’s work it out……..

3. GDP Vs. GNI Gross National Income (GNI) measures the income earned by all the factors of production in the country regardless of where this income comes from. Gross Domestic Product (GDP) measures all goods and services that are made in the country. This means that it included goods and services produced by MNCs and domestic producers. THINK: Which countries are likely to have a significantly higher GNI than GDP?

4. GDP Vs. GNI GNI = GDP + (profit money received from residents abroad – profit sent out of the country) GNI = GDP + Net property income from abroad Net National Income (NNI) = GNI – Depreciation Depreciation is the value lost of capital (equipment, machinery) due to wear and tear. THINK: What if in the next year, prices rise but the output produced is the same? Will GDP increase or decrease?

5. Nominal GDP Vs. Real GDP Nominal GDP is the value of goods and services measured at that time. It is a value reflected in $ or £ or ¥. It does not account for changes in price. Real GDP removes the influence of price changes while calculating the value of GDP. This is so that you can compare the GDP from one year to another. Let’s work it out…….. 1.Calculate the Nominal GDP for both years. 2.Calculate the Real GDP for 2005. 3.Now let’s work out GDP Growth Rate.

6. HOMEWORK Friday 07 September 2012 LET’S ANALYSE!!! Answer these questions in your classwork books. Please use FULL SENTENCES. 1.Name the three flows shown in the Circular Flow Model. Example 1 Example 2

7. 2. Explain how firms are both buyers and sellers in the Circular Flow Model. Example 1 Example 2 This requires a diagram AND a written explanation. NO abbreviations (HH), please!

8. 3. What are the 4 factors of production and what are their respective payments. Example 1 Example 2

9. 4. What is the difference between a closed economy and an open economy. Example A closed economy is one in which there are only two-decision makers – firms and households, whereas in an open economy there is the presence of a government, as well as the existence of international trade.

10. 5. Explain what happens when the size of leakages are larger than the size of injections. Banks Savings Firms Households HOUSEHOLD EXPENDITURE (EXPENDITURE) Investment Government Taxes Government Spending Other Countries Imports Spending on Exports LEAKAGES INJECTIONS Leakages are the flows of money which leave the circular income flow such as savings, taxes and imports. Injections are flows of money which enters the circular income flow such as investment, government spending and exports. These have been shown in the Circular Flow of Income diagram below: Fig. 1 Circular Flow of Income

11. If the leakages are greater than the injections, the income of households reduces and they have less money to spend on buying goods and services. Household consumption will decrease. Firms will reduce their production and this will create unemployment. When unemployment increases, households have lesser income to spend on consumption, and demand for goods and services will drop even more. In conclusion, greater leakages in the economy reduces the household income and the economy shrinks (becomes smaller).

12. HOMEWORK Wednesday 12 September 2012 1.If you want your previous HW to be re-graded, then please re-submit completed work on Friday. 2.Test on Chapter 13 on Friday 14 September 2012