2. Gdp and Economic Well Being, Business Cycle

Gross Domestic Product is a market value of all services and goods, produced in a country during the given period of time, usually one year. It includes a total output (производство) of foreign firms in this country, but does not include an output of domestic firms in a foreign country.

GDP is the best single measurement of economic well-being of the country. Higher GDP, so then higher standard of life. GDP per person shows the average income and expenditure of an average person.

But GDP doesn’t show happiness, quality of life or situation in the country as environment, time parents spend with children, the activity of people in free time.

• Peak (Csúcs): at the peak of the business cycle, Real GDP is at a temporary high.

• Contraction(rövidülés): A decline in the real GDP. If it falls for two consecutive quarters (egymást követő negyedévben), it is said to be in a recession.

• Trough (Árok) The Low Point of the GDP, just before it begins to turn up.

• Recovery (Helyreállítás): When the GDP is rising from the trough.

• Expansion (Kiterjesztés): when the real GDP expands beyond the recovery

• Recession: It s a significant decline in activity spread across the economy, lasting more (tovább tartó) than a few months, visible in industrial production, employment, real income, and wholesale-retail trade”.

3. The components of gdp, gdp deflator

Nominal GDP measures the output in a current year price level. If there is a significant inflation in the country, so nominal GDP will be higher that real GDP

Real GDP measures the output in the base year level of prices.

GDP deflator (an indication of the overall level of inflation or deflation in the economy.) = Nominal GDP/Real GDP

The total demand for GDP (or income)=C+I+G+Nx, where

C-consumption by households

I-investments made by households

G-government purchase

Nx-net export or net foreign demand, which equals to

Ex-export

Im-import

GDP can rise, if

1) price level rises, output remains the same

2) price level remains the same, output rises

3) both price level and output rise

4. Circular Flow Model

Shows income received and payment made by each sector of economy. It is the simplest model that shows how macroeconomics works. The simple example shows hoe aggregate income is exchanged for resources, including the labor, that are bought from households.

Households: all population, own and provide factors of production

(labour, land, capital) to the firms, receive payments (income) from them and generate expenditures for goods and services

(for final consumption) .

They spend money purchasing output of firms.

Income:

+ Wages

+TRANSFERS From Government

Transfer payments are payments made by the government to people who do not supply goods, services, or labor in exchange for these payments.

Expenditures:

-Taxes

-Savings

Firms: “own” technology, employ factors, produce goods and services for final consumption (households, government, export) or for intermediate use (other firms, incl. foreign).

Pay households for use of factors of production

Sell goods and services to households

Incomes:

+Y =C+I+G

+TRANSFERS

Expenditures:

-Taxes To Government

-Wages to Households

-Savings

Government (state)

Collects taxes

Manages activities that society expects from it:

• spends on goods and services for public purpose (e.g. defence), on employees in state administration, even owns some firms (that produce goods and services) – “produces” public services

• finances transfers and social benefits

• Government taxation (T) reduces households’ disposable income and business funds

• Taxation (T) is a leakage (outflow)

• Government spending (G) includes expenditure on collective goods and services and goods and services provided by the business sector, plus transfer payments (social security payments)

Adding Goverment into the Circular Flow Diagram

What happens if we add government to the circular flow diagram

The government collects indirect taxes from consumption and direct taxes from income and uses for government purchases and transfer payments.

• Indirect taxes: T_e (VAT, petrol duties, cigarette taxes)

• Direct taxes: T_d (wages, interest, rents)

• Government expenditure: G

• Transfers: Tr