Transcript Measures of Economic Activity Unit 2.1

Measures of Economic Activity
Unit 2.1
What are GNI, GDP, and GNP?
How does circular flow tell us about these
forms of economic activity?
Why should one be cautious about national
income statistics?
Quick review:
• National income (value of output, or GDP)=a.k.a.
aggregate output=total output
– not always true
• CFI model shows that value of aggregate output
produced=total income generated in producing
that output=expenditures made to purchase that
output
• GDP-the market value of all final goods and
services produced in a country over time
(usually annual)
– Most common measure of value of aggregate output
Calculating GDP
• (Factor) Income method -adding up all income
earned by factors of production within a country
in a year
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Wages earned by labor (employment income)
Rent earned by land (rental income)
Interest earned by capital (household net interest)
Profits earned by entrepreneurship (selfemployment income)
• Compiled figures give us GDP at factor cost,
adjusted for statistical discrepancies
– Furthest extent based on real use of FOP, used to
compare with expenditure method
Only those incomes that are come from the production of
goods and services are included in the calculation of
GDP by the income approach. We exclude:
• Transfer payments e.g. the state pension; income
support for families on low incomes; unemployment pay
and welfare assistance
• Private transfers of money from one individual to
another
• Income not registered with the IRS
– Every year, billions of dollars of activity are not declared to the
tax authorities
– This is known as the shadow economy or black economy
• Published figures for GDP by factor incomes will be
inaccurate because much activity is not officially
recorded – including subsistence farming, barter
transactions and the share economy mentioned above.
Calculating GDP
• Expenditure method- measures the total amount of
spending to buy final goods and services in a country in
a year
– “final”=g/s ready for final use, not intermediate
• Basically looks at total spending over time and divides
spenders into groups in order to follow flows/see who is
spending and on what; equation: C+I+G+(X-M)
– Consumption: divided into durables (cars, refrigerators), nondurables (clothing, Coca-Cola), and services (hotel stays,
repairs)
– Investment here refers only to firms’ expenditures on capital
goods (fixed capital formation)
– Why do we subtract imports? They involve domestic spending
on g/s produced in other countries, so must be taken out of total
GDP expenditures
Calculating GDP
• Output method-measures the value of
each g/s produced in the economy in a
year (total output value) and then subtract
cost of factor use
• Must avoid “double counting” of transfer
payments; count only final goods, and
NOT the value added on to the good
between output at each stage
– Example next slide!
Value-Added and Contributions
to a Nation’s GDP
• Output method of GDP adds together the value of
output produced by each of the productive sectors in the
economy using the concept of value-added.
– Value added is the increase in the value of goods or services as a
result of the production process
• Value-added = value of production - value of intermediate
goods
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EXAMPLE 1: You buy a ham and mushroom pizza from Dominos at a price of
$10.99. This is the final retail price and will count as consumption. The pizza has
many ingredients at different stages of the supply chain – for example tomato
growers, dough, mushroom farmers and also the value created by Dominos
themselves as they put the pizza together and get it to the consumer.
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EXAMPLE 2: Some products have a low value-added, for example those really cheap
t-shirts that you might find in a supermarket for little more than $5. These are low
cost, high volume, low priced products.
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EXAMPLE 3: Other goods and services are such that lots of value can be added as
we move from sourcing the raw materials through to the final product. Examples
include designer jewelry, perfumes, meals in expensive restaurants and sports cars
GDP vs. GNI/GNP
• What happens when the output of an economy is
produced with factors of production belonging to
foreigners?
• Clue is in whether production is:
– Domestic: produced within the country’s boundaries (where
produced, but not who owns)
– National: produced using a given country’s factors (who owns,
not where produced)
– i.e., U.S. multinational firm in India sends its profits back to the
U.S.—output is produced in India, but profit income is received
by U.S. residents
• Does profit count as Indian or U.S. income and output?
• The profit income is included in Indian GDP because it is created by
production taking place in India;
• However, is also part of U.S. GNI (see next slide) because it is
income received by U.S. residents
• GDP—account of money value of g/s produced
within an economy in a year, regardless of
domestic or foreign ownership of FOP
• Gross National Income (GNI), formerly known
as Gross National Product (GNP)—measures
total income of the country’s residents,
regardless of where income originates
– Takes into account foreign ownership in the economy
and domestic ownership of firms abroad
– GDP + property income from abroad – property
income paid abroad = GNI
– GDP + net property income from abroad = GNI
Explanatory video
Real vs. Nominal GDP/GNI
Video clip
Since GDP is composed of millions of different goods, it’s impossible to
measure it in actual quantities, so we measure it in value terms—Q X P.
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Nominal value—money value; value
measured in terms of current price
(nom=name; face value)
Problem=value of money continuously
changes (inflation)
– Economists try to avoid nominal
GDP figures
Since we measure GDP using money
terms, the value of output has been
inflated by the increase in prices
– Output calculated by Q X P
Real value—measurement of value
taking into account changes in prices
over time, in order to make meaningful
comparisons of GDP over time
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Creates “constant price”
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Allows us to compare nominal value
with base value, or base year
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base year--used for comparison for the
level of a particular economic index
The arbitrary level of 100 is selected so
that percentage changes (rising or
falling) easily shown
Ex: find rate of inflation between 2005
and 2010; one would make calculations
using 2005 as the base year, or the first
year in the time set
HL material: GDP deflator:
GDPreal = GDPnom base year___x 100
Price index of base year
Total and per capita GDP/GNI
• “Gross” is total amount made
as a result of some activity.
• “Net” is the amount left over
after all deductions are made.
Net value is not allowed to be
made lower.
• Per capita (“per person” or
“per head”)—takes the total
value (output, income,
expenditure) and divides it by
the total population of a
country
– GDP/GNI divided by the total
population
• Ex: Ireland’s GDP 2001:
€114,744; divided by the
population, we get per capita
GDP €29,889
Word of advice:
• Beware of averages when considering per
capita GDP/GNI, either nominal or real!
• Income distribution can be such that a
small proportion of the population
accounts for most of the income; this does
not show in the per capita GDP/GNI
figures.