Chapter: 8

The level of overall economic activity

MEASURES OF ECONOMIC ACTIVITY
 The methods of calculating GDP
• Output method- measures GDP by adding up
the output produced by all the industries in
the country.
• Precaution- ensure that o/p is not calculated
more than once
• Ex: Assume that there are only 4 production
firms engaged in production of garments
Firm A PRODUCES RAW SELLS IT FOR RS1000 FIRM B
COTTON
Firm B CONVERTS IT INTO SELLS IT FOR RS 1500 FIRM C
COTTON YARN
Firm C MANUFACTURES SELLS IT FOR RS 2200 FIRM D
COTTON CLOTH
Firm D PRODUCES GARMENTS SELL THEM FOR RS FINAL CONSUMERS
3500
TOTAL VALUE OF RS RAW COTTON HAS ON THE CONTRARY ,
ALL THE 8200=(1000+1500+2200 BEEN COUNTED 4 VALUE OF FINAL
TRANSACTIONS/GR +3500) TIMES GOOD= RS 3500.
OSS OUTPUT COTTON YARN FOR
3TIMES,COTTON
CLOTH FOR 2 TIMES.
CERTAIN ITEMS COUNTED MORE THAN RESULTING IN OVER- PROBLEM OF DOUBLE
ONCE ESTIMATION OF COUNTING(COUNTING
NATIONAL PRODUCT THE VALUE OF THE
SAME COMMODITY
MORE THAN ONCE)
To avoid this economists include the
problem “value added” by each
firm at each stage of
production
• Income method: includes all the incomes which
have been earned in producing the country’s
output.
• Transfer payments, such as pensions and
unemployment benefits are not included.
This is because there is no corresponding output
of goods and services.
• GDP= Total National income+ Indirect tax+
depreciation + NFIA
• GDP is not equal to national income.
• Expenditure method:
• GDP=C+I+G+(X-M)
THE BUSINESS CYCLE