The level of overall economic activity
Circular flow of income model (I)
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This model shows that in a given time period, the value of output produced in this economy = total income generated in producing the total output = total expenditure made to purchase the outputs
Assumption of this model
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Closed economy (with no government intervention and exportation/importation)
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Everyone in this circular flow must spend all their income in this circular flow
Circular flow of income model (II) - Injections and leakages
Assumption of this model
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Open Economy (with government intervention and exportation/importation)
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Everyone can choose how and where to spend their income
Economic Activity
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GDP = The total market value of all final goods and services produced in a country over a time period
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We have three ways to measure economics activity within an economy: Expenditure approach, Income approach, Output approach
Expenditure Approach
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C + I + G + (X-M)
Income Approach
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Adds up all income earned by the factors of production within a country over a time period
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Total national income + Sales Taxes + Depreciation + Net Foreign Factor Income (FYI)
Types of income (From FOPs)
Output Approach
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Gross value of output - Value of intermediate consumption (FYI)
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Measures the value of each good and service produce in an economy over a particular period of time, and sums them up
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Calculated by different economic sector
*Normally Expenditure approach = Income approach = output approach
Formulas & Definition
Nominal Values vs. Real Values
The Business Cycle
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Fluctuations in the growth of real output, consisting the alternative periods of expansion and contraction
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Long term growth trend / Potential GDP - The GDP that an economy will be able to produce if every resource is maximizing its uses.
