uh hi everyone so let me just add a couple more things there we go all right welcome so today i was going to review the first part of macroeconomics all right i'm just quickly making sure i have everything that i need so that i don't forget um and then we will begin just give some people to a chance to join so all right so hi everyone um it's good to see you all once again uh today as i said mentioned earlier in the community tab i'm going to review it be reviewing the first part of macroeconomics so how is economic activity measured okay now the real world issue in this case and this is something that you really need to think about is basically why does economic activity vary over time and why does this matter right so in order to really be able to answer this real-world focus we need to actually okay well how do economists measure economic activity how do economists know whether the economy is in the state of recession or in the state of inflation there has to be a way by which economists measure economic activity okay so this is what this part will be about next week at the same time i'm going to be doing aggregate demand and aggregate supply okay so um next week will be the aggregate demand and the aggregate supply uh review all right um some of some students really struggle with the whole difference between the keynesian and the new classical model so that will be the focus on next week but this week i really want to start at with um uh measuring economic activity how is it measured and why does it matter how economic activity is measured all right so we start with the circular flow all right um the households the circular flow divides the economy into five main sectors okay you've got the household sector these are the owners of the fops okay so remember they are the owners of the factors of production they own the land the labor the capital and the enterprise the firms for the businesses are the employers of the fop they are the ones that employ okay so we don't divide them into consumers and producers because that focuses too much on individuals we look at institutions the household sector are the owners of the fbp so what the household sector does is they give their fops okay um their labor their land their capital and their enterprise they give that to the firms in return they receive factor incomes okay so labor the owners of labor receive wages the owners of land receive rents the owners of capital receive interest and the owners of enterprise receive profit okay this is the first flow this is like the factor flow factors of production flowing from the household sector to the business sector and in return they get the factory comes now what do what does the business sector do with these factors of production well the business sector takes these factors of production and produces basically output of goods and services and in return households spend money expenditure on goods and services that comes back to the business sector okay so these are the two main flows the output flow the factor flow and the income flow all right now with the expenditure flow we add leakages and injections okay so there are three leakages saving taxes and spending on imports these three in green are the leakages and there are three injections investment spending government spending and export revenue these are the injections okay so not all the income that is received by households is actually spent on goods and services some of this income flows to the financial markets and the banking sector in the form of saving some flows to the government sector in the form of taxes and some flows to other countries or the foreign sector in the form of spending on imports which remember is called import expenditure that's it's like fancy name okay so these are the three leakages but each leakage has a corresponding injection all right the money that's in financial markets that's in the banking sector goes back to firms in the form of investment expenditure the government even though it takes our taxes it injects it back into the economy in the form of government spending or government expenditure and um we also get money from other countries when they buy our goods and services that comes back in the form of what we call export revenue so foreign countries spending on our exports okay now the three approaches to measuring gdp or to measuring national income can actually be derived from this circular flow okay there are three approaches to measuring gdp all right so first of all three approaches to measuring national income or measuring gdp the first one is the output flow or the out sorry not upper flow output approach the output approach is basically in theory in oversimplified terms it's the total revenue of all firms in the economy total revenue is price times quantity so it's p1 q1 plus that's the total revenue of firm one okay p2 q2 plus all the way plus to p and qm so basically what's happening is the government is totaling up all the total revenue of all firms in the economy that's the output approach so this focus is here on this arm or on this arrow that's the output of this axis that's the first approach to measuring the gdp international income the second approach is the income approach that looks at the total income generated of all by all factors of production okay so the total wages w plus total interest i plus total rent are plus total profit okay generated within that accounting period whether it's three months or a year okay let's just say within a year okay total wages received by owners of labor interest received by owners of capital rent received by owners of land and profit received by the entrepreneurs that's the income approach that is this arrow here the this arrow here that flows from the business sector to the household sector in the form of factory incomes okay and then there is the slightly more complicated one which is the expenditure approach the expenditure approach is basically the same formula as aggregate demand okay the expenditure approach is measures gdp as c plus i plus g plus x minus m okay what is c what is i you might be asking i'll definitely answer those questions c okay so c is all the consumer expenditure i'll change the color to graph c is all the household expenditure on goods and services that's c i is the total investment spending coming from financial markets to the business sector that's i g is the total government spending coming from the government sector to the businesses that's g x is all the export revenue that the country receives from other countries minus m minus m is the import expenditure okay that leaks out of the economy so the only leakage that we actually include in this approach the expenditure approach to measuring gdp the only leakage that we actually include is input expenditure okay because that's money that flows out so this is the expenditure approach c plus i plus g plus x minus m now in theory the output approach the income approach and the expenditure approach there are three approaches to measuring the same thing right so in theory they should yield the same results because you're ultimately measuring the same thing now obviously in practice that does not always happen why because some data is unreported there's an underground informal economy there's illegal activity um in practice they don't yield the exact same number that's why there are statistical discrepancies okay but the expenditure approach you know this formula you'll see it later is basically looks at aggregate demand while the output approach is basically aggregate supply all right in theory also aggregate supply is the income approach because how much output you produce is basically how much income is generated okay so just something to keep in mind uh now obviously questions in this session are open to the members of my channel right so in those sessions and in the future uh if you'd like to ask questions and chat with me during the session this is a privilege um that is open to members you can find all the links to support the channel become a member buy me a coffee all the links in the description below um i would encourage you to become a member because i think these review sessions um are very useful to members subscribers and everyone who's watching but asking questions and being able to interact with me is a way to help you review okay all right so i've just reviewed the three approaches to measuring gdp okay so i talked about national income as a measure of uh economic activity i talked about the equivalent of the income output and expenditure approaches with reference to the circular flow and i've done the circular flow all right so let's talk about gdp and then all the adjustments that are made to gdp so gdp is the total money value of all final goods and services produced within an economy in one year okay so total money value of all final goods and services produced within within is a very important feature an economy in one year or three months gdp is measured every quarter by the way but it doesn't matter in one year or you the point is you have to have a beginning and an end of the time period you're measuring gpa so what are the key terms here first of all it's a money value so it's expressed in money terms final means it excludes all intermediate goods and services right intermediate goods and services are already reflected in the money value of that final global service produced within anything produced within the borders of the economy okay it doesn't matter if the producer is a citizen of that name or economy or not okay so if you're doing the gdp of the united states and there are chinese companies in the united states they will um their output will be included in the countries in the united states gdp okay regardless of whether or not they are um citizens of the united states also if you have american companies overseas outside the united states like say in china their output is not included in american gy because their output is not within the economy of the united states this is very important to keep in mind because make it easier for us to understand gli so how do we measure gdp again the three approaches i said the output approach the income approach and the expenditure approach however gdp is not a perfect measure so we make some adjustments based on what we need from this uh national income statistic okay so what are some of those adjustments so basically adjustments to gdp to get a more complete picture of economic of the level of economic activity or the performance of the economy the first adjustment adjustment number one is from gdp to g and i okay remember how i said gdp focuses on the location of production where is the production taking this okay gni on the other hand focuses on the nationality of this production okay take so gni is equal to gdp take that gdp and then you add any income generated by citizens living abroad all right any income generated by citizens living abroad and you subtract any income generated by foreigners living in the country okay so if you're going to get the gni of the united states you basically take the gdp measurement and then you add any income generated by american citizens that are living abroad remember this income could be wages or interest or rent or profit it doesn't matter but it's any income generated by americans living abroad any wages earned by americans living abroad any interest by americans living abroad any rent payments made to americans any profit okay and then you subtract any income generated by foreigners living in the country again that's wages interest rates and profit what that does is it focuses on okay um who it focuses more on who is generating the income rather than where is the income being generated so gdp focuses on where gni focuses on who is generating this income okay now these two together if you put them within a um a uh what's it called um like a bracket or parentheses that's called the net property income from so to give you an example i live in the united states but i'm not american i'm an australian citizen actually okay my salary and my income is generated within the united states so it would be included in american gdp so the gdp of the united states would include all of my income okay but the gdp of australia would exclude my income because i don't live in australia my income's not generated in australia however when america is calculating its gni it would exclude my income because i am not american i live here and i work here but i am not a citizen i'm here on a workplace australia on the other hand would include my income in australia in gni okay so just to give you an idea now um this applies to all sorts of income wages interest rent and profit okay now you might be thinking well how do they know this well because if you think about it we report our incomes to governments and our citizenships all the time right when you fill out the tax return right um the government knows your citizenship status the government knows the income you're making and um even in australia i have to report my income to show that i'm paying taxes in the united states so that i'm not i don't have to pay taxes in australia and so on so all so this data is available now obviously there is missed data there's income that's generated that's not reported and so on but generally that's how it's headed so that's the first adjustment all right what's the second adjustment so the first adjustment is from gdp to gni okay we did this so here we go the second adjustment is this is adjustment number two the second adjustment is from nominal measurements to real okay whether it's gdp or gni it doesn't matter this adjustment you can make to gdp or g9 what's the difference well nominal is any measurement that is not adjusted for inflation meaning not adjusted for inflation meaning it is using current prices real on the other hand real on the other hand is and it just so is adjusted for inflation meaning it is using fixed prices okay say for example you are comparing the gdp from 1950 to today that's a 70 year difference obviously in those 70 years prices have changed they've risen right they've risen dramatically so you can't compare the raw or like the nominal gdp of the us now with the nominal gdp of the us in 1950 right because that's going to give you this impression that wow gdp has grown dramatically but once you eliminate the effect of inflation okay and you're comparing real figures so remember this adjustment allows for comparisons over time that's why we make this adjustment okay when our goal is to compare over long periods of time we convert nominal measurements to real measurements that's when our goal is to make those comparisons okay so to allow for comparisons over time we take this nominal so um real gdp is basically equal to nominal gdp or gni by the way divided by something we call the gdp deflator times 100 okay so how do you calculate this well basically you will be given either um nominal gdp and the gdp deflator and you have to calculate real gdp or you might be given the gdp translator via gdp and you have to calculate the nominal you just rearrange the equation it doesn't really matter okay so that's adjustment number two why do we make it to allow for comparisons over time adjustment number three adjustment number three okay and this is to allow us to compare between countries okay adjustment number three is from total gdp or gmi to per capita this is basically to adjust for population size remember adjustment number one from gdp to gni is to adjust for location where is this production or this income being generated adjustment number two is to adjust for inflation to adjust for inflation that's adjustment number two adjustment number three is to adjust for population size okay so gdp per capita is basically not capital capital i always write the l by x and i'm not thinking is equal to total gdp the gdp that you measured using the output income or expenditure approach divided by population okay that's the total gdp per capita gni per capita by the way is exactly the same okay it's total gni that you calculated using the first adjustment here divided by population and that this adjustment so just for population why do we do it to allow for comparisons between countries so the the second adjustment here from nominal to real is to allow for comparisons over time this adjustment is to allow for comparisons between countries so usually to compare between countries we take real gdp per capita or rio so it's already adjusted formulation gni per capita that's to compare between now the last adjustment you kind of have to understand so this is adjustment number four the last adjustment you have to understand but there is no formula for it you don't have to actually calculate it and this is um from again um like from uh i don't know so basically it's adjusting for cost of living right using what we call ppp purchasing power um parity okay pvp purchasing power parity and this is because if you want to compare gdp per capita of the us with the gdp per capita of china life in china is much cheaper in general than life in the united states right so you have to adjust for these differences in cost of living you either have to deflate gdp in the us to be able to compare it to china or you have to inflict gdp in china to be able to compare okay so um there is no calculation for this but let's just imagine so let's just imagine uh gdp i'm pulling numbers off the top of my head by the way these they're not accurate whatever but the gdp per capita in the usa is sixty thousand dollars while gdp in china is say twenty thousand dollars okay if you're going to compare these two values it might appear that on average on average the um american worker earns four times remember 60 000 is i mean three times not four times three times as much as the average chinese citizen okay however when you adjust for cost of living what if i told you that life in the united states is twice as expensive as life in china so you can basically cut this in half to 30 000 using china's cost of living that's a more accurate measurement now it appears that when you adjust for cost of living you allow both countries to use the same cost of living the average u.s citizen makes about the equivalent of 30 000 in china while the average chinese citizen makes about 20 000 okay that allows for a more accurate so you can see here that the american worker on average is only um one and a half times richer or generating one and a half times more income than the chinese citizen by the way you can also make the adjustments the other way around so remember i told you let's imagine that the cost of living in china is twice as expensive as the cost of living in the united states well you can then double this instead so instead of this being 20 000 using u.s cost of living it would be around so 20 000 in china is the equivalent of 40 000 in the us again you have the same value you can see that the average u.s citizen is only one and a half times as rich as the average chinese citizen so it doesn't matter which direction you make the adjustment now there is no formula for this i just want you to get the idea one very famous ppp index is the big mac index okay which um it's really basically it's an index that looks at the cost of the big mac how much does a big bank what's the price of the big mac to buy in every country around the world and that helps us give us an idea because it's the same product the big mac by mcdonald's it's the same everywhere but seeing how much you know if a big mac in the united states costs one dollar and in china it costs 50 cents right then in general that means that um life in china is half the cost of doing china is half that of the united states or whatever that's one way of adjusting for ppp measurements all right so now we've talked about let's see we've talked about real gdp and real gni we've talked about per capita and purchasing power parity that leaves us with the business cycle which is the other diagram here in this unit and there we go the business side so the business cycle what it does is it tracks output like real gdp so it's already adjusted for inflation over time okay and there's a long term growth trend or a long term line and short-term fluctuations okay so the long-term trend is that there is growth in the nation's potential gdp or potential up that's the long-term trend okay but in the short term this growth is not very uniform there are fluctuations if the economy goes through periods where economic activity peaks okay um you could call this a boom okay and then it starts to slow down and it goes through a trough where you have a slump in economic activity and then you have periods of expansion this expansion peaks and then economic activity contracts and so on so during a boom you see um inflation increasing and unemployment decreasing right and during a slump for a trough you have a recession which is the opposite you have inflation decreasing and unemployment increasing okay so this is to kind of prepare you for what's coming next why um economies are either experiencing periods of inflation or periods of recession during periods of inflation the unemployment rate is low but the inflation rate is high economic activity rate is high okay economic growth rate is high during periods of recession economic growth rates are low unemployment rates are high inflation rates are low okay these are the now what now all economies experience business cycles but what governments try to do is to try to prolong a period of expansion by managing the inflation so that it doesn't get out of control and they try to shorten or soften periods of recession okay so ultimately what governments try to do is they try to manage economic activity so that periods of expansion or homes are prolonged and periods of recession are shortened okay so this is the business cycle diagram again you just need to know that there are short-term fluctuations and long-term growth in potential output here we need to also uh distinguish between actual output and potential output potential output of potential gdp is what the economy is basically capable of producing okay this is the productive capacity of the economy all right actual output is what the economy is actually producing so this solid line here is what the economy is actually okay so why is this relevant when actual output is greater than potential output the economy will be overheating which means the main concern of the government will be inflation inflation is the main concern when actual output is less than potential output the economy is basically slowing down okay there is a recession which means the biggest priority will be the unemployment rate so during periods of recession the biggest priority is unemployment during periods of inflation obviously the biggest priority is inflation okay so something to kind of keep in mind okay so we just did um now here i'm just going to talk about the appropriateness of using those statistics first of all gdp and genetic statistics remember they um they they allow us to compare economic well-being and measure economic well-being and compare between countries but comparisons over time can only be done if we use real measurements okay which means to be able to compare over time we need to adjust for inflation and that's why we uh make that adjustment from nominal to be able to compare between countries we need two adjustments first of all we need to adjust for population size which is why we use per capita measurements and we need to adjust for cost of living differences right which is why we use ppp so therefore the most appropriate measure to allow us to compare between countries is real g and i per capita this basically you have adjusted for citizens right you have adjusted for population you have adjusted for inflation and cost of living so real gni per capita at ppp is really the one that allows us to give us the most accurate way of comparing between countries now there are alternative measures of well-being there are many by the way but you only need to know these three so i would suggest that you go check the um glossary get the definition and know how these so the oecd better life index that's very limited because it only looks at the oecd countries which is basically a club of which countries the happiness index focuses more on quality of life remember standard of living so gdp per capita measures the standard of living it's very material it only looks at how much goods and services can people consume in a period of one year that's a very limited measure of economic well-being because standard of living does not equal quality of life i always tell my students this remember standard of living does not equal quality of life just because the standard of living in this country or economy is high doesn't mean all citizens are happy quality of life is more multi-dimensional it looks at things like crime rates are they low divorce rates are they low um suicide rates are they low access to education and healthcare and basic necessities uh freedoms are people free to express themselves and so on so quality of life is more multi-dimensional this will tie in when we get to the development economics unit okay standard of living is very material right it just looks at access to goods and services okay it's how much money people are making on average but quality of life is more multi-dimensional and therefore when you look at the happiness index and the happy planet index you see that the richest countries aren't always yes definitely being a richer country allows for a better quality of life but richer countries aren't always the ones with the happiest um citizens or the best quality of life this is something to keep in mind and that's why we use these alternative measures of well-being now this is only an assessment objective too which means you really need to be able to just explain these but you don't really need to be able to to to talk too much about them it's a very sort of low level and there you go so this real world issue is why does economic activity vary over time and why does this matter and we've basically looked today we've just looked at well how is economic activity measured next week i'm going to review aggregate demand and aggregate supply and changes in aggregate demand and aggregate supply and we'll see why changes in agricultural supply actually affect the economic well-being of people remember changes in the condition of demand supply here they're talking about aggregated supply cause economic activity to vary over time okay and these fluctuations in economic activity impact the economic well-being of people living in this economy as well as societies and there are different schools of macroeconomic thought that identify different causes and different solutions for macroeconomic problems okay so we're going to look at macro economic problems like goals and african objectives like low unemployment low and stable inflation rates high economic growth and so on okay um and there you go i that was a quick 30 minute or so review of how is it economic activity measured and the business cycle and the different adjustments that we make to those measurements of economic activity anyway it's been great um every week i will try to review a different part of the service so go to the communities tab and and follow because i usually try to poll people what they want me to review um i imagine that some people will want me to review aggregate demand and aggregate supply and that's why it would be part of the poll and please check the description below all the ways you can support this channel you can become a member buy me a coffee uh subscribe please hit subscribe a lot of people watching they don't hit subscribe subscribing and liking the videos and commenting on the videos is one of the best ways to boost engagement and let the algorithm uh basically recommend my videos to others all right it's been great thank you all whoever attended and i hope you find this useful have a great rest of your weekend bye