National Income Accounting, Circular Flow, Growth and the Business Cycle
This section covers national income accounting, the circular flow, economic growth and the business cycle. The exam tests your ability to distinguish GDP from GNP, real from nominal values, and injections from leakages.
Core rules
- GDP measures the market value of final output produced within a country in a period. It can be measured by output, expenditure or income, subject to statistical discrepancy.
- GNP or GNI = GDP plus net factor income from abroad. Ireland's GNP is often lower than GDP because of profit outflows from multinationals.
- Nominal GDP uses current prices; real GDP uses constant prices. The GDP deflator = nominal divided by real times 100. GDP per capita divides by population.
- Exclude intermediate goods, transfer payments, second-hand sales and illegal output to avoid double counting.
- Circular flow: households supply factors and buy output; firms produce. Injections are investment, government spending and exports; leakages are saving, taxes and imports. Equilibrium occurs when injections equal leakages.
- The business cycle has expansion, peak, contraction and trough. Growth is a sustained rise in real GDP; potential growth depends on resources and productivity.
Worked example
Nominal GDP rises 5% and prices rise 3%. Real growth is approximately 5% minus 3% = 2%; more exactly (1.05 divided by 1.03) minus 1 = 1.94%. If population grows 1%, real GDP per capita grows about 0.94%.
Traps
Do not use nominal GDP to compare living standards over time. Do not add transfer payments to GDP. Do not confuse a recession with a single bad quarter. Do not treat GDP per capita as a complete welfare measure.