Macroeconomic activity

Gross Domestic Product (GDP). Total market value of all FINAL goods and services produced within a country's borders in a year.

Three approaches to measuring GDP (all should give the same answer):

• Output (production) approach — sum of value-added at every stage.
• Income approach — sum of incomes (wages, rent, interest, profit).
• Expenditure approach — GDP = C + I + G + (X − M).
  • C = consumer spending.
  • I = investment.
  • G = government spending.
  • X − M = net exports.

Gross National Income (GNI). GDP + net income from abroad (residents earning overseas minus foreigners earning here). Useful for countries with significant outward or inward investment.

Real vs nominal:

• Nominal GDP — current market prices; affected by inflation.
• Real GDP — adjusted for inflation; reflects actual physical output.

Real GDP = Nominal GDP × (100/Price Index). When comparing across years, use REAL GDP.

GDP per capita = GDP / population. Better proxy for living standards than total GDP (a large country with high GDP per capita may have low per-person well-being).

Business cycle. Short-run fluctuations of real GDP around its long-run trend.

Phases:

• Peak — highest level of activity; often unemployment is low, inflation rising.
• Recession (contraction) — falling real GDP for 2+ consecutive quarters.
• Trough — lowest point; high unemployment.
• Recovery (expansion) — rising real GDP.
• Long-run trend — underlying growth path.

Recessions often follow shocks: oil prices (1970s), financial crises (2008), pandemics (2020).

Limitations of GDP as a welfare measure:

• Ignores INFORMAL ECONOMY (unrecorded transactions).
• Ignores DISTRIBUTION — GDP per capita masks inequality.
• Ignores ENVIRONMENTAL DAMAGE — polluting industries boost GDP.
• Doesn't measure WELL-BEING — health, leisure, security.
• Excludes UNPAID work (housework, care).
• Excludes external costs of growth.

Alternative measures:

Measure	Includes
Human Development Index (HDI)	Income (GNI per capita) + Health (life expectancy) + Education (years of schooling). 0–1 scale. Used by UN.
OECD Better Life Index	11 dimensions: income, jobs, housing, health, education, environment, civic engagement, etc.
Genuine Progress Indicator (GPI)	Starts from consumption, adjusts for inequality, household work, ENVIRONMENTAL damage, defensive expenditures. Often LOWER than GDP.
Happy Planet Index (HPI)	Well-being + life expectancy ÷ ecological footprint.

Implication. GDP remains useful for measuring economic activity but should be supplemented for assessing genuine welfare.