Foundations of Economics 4e

Chapter 18: National income and

the standard of living
Andrew Gillespie

© Andrew Gillespie, 2016. All rights reserved.

Measures of national income

• Gross Domestic Product (GDP)

This measures the value of final goods and services
produced in an economy. It shows how much has
been earned within a country’s national boundaries.
• Gross National Product (GNP)
This measures the value of final goods and services
earned by UK nationals as opposed to the amount
of money earned within the UK.

© Andrew Gillespie, 2016. All rights reserved.

Standard of living

Usually measured by:

Real GDP per capita = real GDP

population

© Andrew Gillespie, 2016. All rights reserved.

 The Lorenz curve and the
Gini coefficient

• The Gini coefficient is a measure of inequality within an

economy
• The higher the coefficient the greater the inequality

© Andrew Gillespie, 2016. All rights reserved.

Factors other than income that
affect the standard of living

• The quality of goods and services provided

• The quality of life
• Non-marketed items
• The “black economy”- this refers to all the work
that may be done in an economy but is not
declared
• Environmental issues
• Wealth
© Andrew Gillespie, 2016. All rights reserved.
Key learning points

• National income can be measured in terms of

output, income or expenditure
• Gross Domestic Product measures the income
generated in a country
• Gross National Product measures the income of
a country’s citizens
• Real national income adjusts the nominal income
for inflation
© Andrew Gillespie, 2016. All rights reserved.
Key learning points

• The standard of living in an economy is often

measured by the national income per person.
However this ignores the distribution of income
• The Gini coefficient measures how equally
income is distributed in an economy
• The standard of living will depend on many
factors apart from income, such as the quality of
goods and environmental issues
© Andrew Gillespie, 2016. All rights reserved.
Foundations of Economics 4e
Chapter 19: Aggregate demand,
aggregate supply, and the price
level
Andrew Gillespie

© Andrew Gillespie, 2016. All rights reserved.

Aggregate demand

• Is the quantity of final goods and services that individuals and

organizations in an economy are willing and able to buy at
each and every price, all other things unchanged.

© Andrew Gillespie, 2016. All rights reserved.

Aggregate demand

The level of aggregate demand depends on

• The price level
• Households’ incomes
• Households’ and firms’ expectations (which will affect their
spending)
• Government spending
• The level of spending on exports and imports

© Andrew Gillespie, 2016. All rights reserved.

Aggregate demand

© Andrew Gillespie, 2016. All rights reserved.

Aggregate supply

• Is the quantity of final goods and services that firms in an

economy are willing and able to produce at each and every
price, all other things unchanged.

© Andrew Gillespie, 2016. All rights reserved.

Aggregate supply

The level of aggregate supply depends on:

• The price level
• The level of technology in an economy
• The size of the labour force and its skills
• The amount and state of capital equipment
• The skill of management to combine resources and use them
effectively

© Andrew Gillespie, 2016. All rights reserved.

Aggregate supply

© Andrew Gillespie, 2016. All rights reserved.

A shift in aggregate supply

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Equilibrium in the economy

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The effect of an increase in
aggregate demand

Likely to lead to an increase in

prices and output

© Andrew Gillespie, 2016. All rights reserved.

The effect of an increase in
aggregate demand (short and long
term)

© Andrew Gillespie, 2016. All rights reserved.

The effect of a decrease in
aggregate demand (short and long
term)

© Andrew Gillespie, 2016. All rights reserved.

Different views of aggregate
supply

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Supply-side policies

Focus on changing the aggregate supply rather than demand-

side policies that focus on aggregate demand, e.g. increasing
the:
• Quantity of resources available
• Quality of those resources
• Efficiency in the way resources are used

© Andrew Gillespie, 2016. All rights reserved.

The effect on price and output of
an increase in aggregate demand

© Andrew Gillespie, 2016. All rights reserved.

The effect of an increase in
costs

© Andrew Gillespie, 2016. All rights reserved.

The long run effect of an increase in costs

© Andrew Gillespie, 2016. All rights reserved.

Changes affecting potential output

© Andrew Gillespie, 2016. All rights reserved.

Supply side policies

© Andrew Gillespie, 2016. All rights reserved.

Key learning points

• Equilibrium in an economy occurs where aggregate demand

equals aggregate supply
• Aggregate demand is downward sloping in relation to price. A
higher price level for a given level of income reduces the
quantity demanded
• Aggregate supply is generally upward sloping in relation to
price

© Andrew Gillespie, 2016. All rights reserved.

Key learning points

• An increase in aggregate demand will usually lead to an

increase in price and output. The relative impact on price
compared to output depends on the price elasticity of
aggregate supply
• Aggregate supply is more price elastic when the economy is
well below full employment; it is price inelastic at full
employment

© Andrew Gillespie, 2016. All rights reserved.