Gross Domestic Product (GDP)

• National income accounting measures the?economic activity?within a country and provides insights into how a country is performing
• One of the main methods to determine?economic?activity?is to measure the?rate of change of output?in an economy
• The output of an economy is called?gross domestic product (GDP)
• GDP is the?value of all goods/services?produced in an economy in a?one-year?period
• It can be measured using the following approaches
  • The expenditure approach:?adds up the value of all the expenditure in the economy
    • This includes consumption, government spending, investment by firms and net exports (exports - imports)
  • The income approach:?adds up the rewards for the factors of production used
    • Wages from labour, rent from land, interest from capital and profit from entrepreneurship
• Both approaches should provide the?same figure?as one party's?expenditure?is another party's?income
• The?value of GDP?is different to the?volume of GDP
  • The value is the?monetary worth
  • The volume is the?physical number

The Distinction Between Real, Nominal & Per Capita GDP

• In economics, the use of the word?nominal?refers to the fact that the?metric?has?not been adjusted for inflation
• Nominal GDP?is the?actual value?of all goods/services produced in an economy in a?one-year?period
  • There has been?no adjustment?to the amount based on the?increase in general price levels?(inflation)
• Real GDP?is the?value of all goods/services?produced in an economy in a?one-year?period - and?adjusted for inflation
  • For example, if?nominal GDP?is ￡100bn and?inflation is 10%?then?real GDP?is ￡90bn
• GDP per capita?= GDP / the population
  • It shows the?mean wealth?of each citizen in a country
  • This makes it easier to compare?standards of living?between countries:
    • For example, Switzerland has a much higher GDP/capita than Burundi

• GDP may not be the best metric to measure a country's?output?or?wealth
• GDP?measures the value of production?within a country's borders
  • It does not consider the?income earned?by its citizens while operating?outside of the country
• Gross national income (GNI)?measures the?income?earned by citizens operating?outside of the country + the GDP
  • Many citizens?employ their resources?outside of a country's borders - and then send the income home
• Gross national product (GNP)?takes it one step further
  • GDP + income from abroad - income sent by?non-residents?to their home countries
• GNP/capita?provides a much?more realistic view?of a country's wealth than?GDP/capita

• National income statistics?are useful for making?comparisons between countries
  • They provide insights on the?effectiveness?of government policies
  • They?allow judgments?to be made about the relative?wealth?and?standard of living?within each country
  • They allow comparisons to be made over the same or?different time periods
    • For example, the growth of the Asian Economies in the?last 15 years?can be compared to the growth of the?European Economies in the 1990s
• Using?real GDP?is a better comparison than?nominal GDP
  • One country may have a much higher rate of economic growth, but also a much higher rate of inflation. Real GDP provides a better comparison
• Using?real GDP/Capita?provides better information than real GDP as it takes?population differences?into account
• Using?real GNI/capita?is a more realistic metric for analysing the?income available per person than GDP/capita
• Using?real GNP/capita?provides information on the?income?that is actually?within a country's borders
  • This value can be significantly different from GDP/Capita

• Purchasing power parity (PPP)?is a?conversion factor?that can be applied to GDP, GNI and GNP
• It calculates the relative?purchasing power?of different currencies
  • It shows the number of?units of a country's currency?that are required to buy a product in the?local economy, as $1 would buy of the?same product?in the?USA
• The?aim of PPP?is to help make a more accurate?standard of living comparison?between countries where goods/services cost?different amounts
• If a?basket of goods cost $150?in Vietnam (once the currency has been converted) and the same basket of goods?cost $450 in the USA, the?purchasing power parity?would be 1:3
  • It seems like the?cost of living?is much higher in the USA
  • However, if the?USA GNP/capita?is more than?three times?higher than the GNP/capita of Vietnam, it could be argued the USA has?better standards of living
  • Conversely, if the?GNP/capita?in the USA was?less than three times?that of Vietnam, it could be argued that Vietnamese citizens enjoy a?higher standard of living?as they spend?less income?to acquire the same?goods/services

?A Table Which Explains the Limitations of Using GDP Data to Compare Living Standards Between Countries & Over Time

• National happiness?and?societal well-being?are measured in the UK by the?Office for National Statistics?(ONS)
• While?GDP focusses on production, happiness focuses on?health, relationships, the environment, education, satisfaction at work and?living conditions
• National incomes statistics?tend to present more?positive data?while national happiness surveys yield more?normative data
• There is a link between income and happiness and the?Easterlin Paradox?is often used to explain it
  • Happiness?and increases in?income?have a direct relationship up to a point
  • Beyond that point, the relationship is?less evident