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

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 = Value of Output (Agriculture) + 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). NATIONAL INCOME = TOTAL WAGES + TOTAL RENT + TOTAL INTEREST+ TOTAL PROFITS

A closer look at the EXPENDITURE APPROACH Consumption (C) Investment (I) Government Spending (G) Net Exports (X-M) GDP Gross Domestic Product E = C+I+G+(X-M) The EXPENDITURE approach measures the total amount of spending (or expenditure) to buy goods and services in a country.

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)