Download GDP and growth

Measuring Economic Activity
Measuring National Income
National Income= Total Income of
an Economy= Total Output
Most common measure is GDP…
Recall…
expenditure
income
output
This will give us Gross Domestic Product (GDP)
The EXPENDITURE approach
GDP= C + I+ G + (X-M)
Consumption
Expenditure
• All spending by households on
final goods and services (incl.
durable and non- durable
consumer goods plus
services. Does not include
spending on housing)
Investment
Expenditure
• All spending by firms on
capital goods (includes
construction of housing. Also
includes changes in
inventories- output which is
made but not sold)
Government
Expenditure
• All spending by government (national,
regional and local)
• Capital Expenditure – building a new school
is an example, also improving capital by
spending on roads and hospitals
• Current Expenditure – the spending
required to run services and use the
capital employed. Salaries of public
employees (NHS, Education, Police, Local
govt, Armed forces….) and materials used
(books, medicines, stationary….)
• Note. Transfer payments- eg.
Unemployment benefits and pensions are
not included in government spending
neither are debt interest repayments (no
output is produced for these payments)
Net Exports (X-M)
• Total revenue from exports X
(i.e. the value of all goods and
services produced in the
country but sold abroad)
• Minus
• Total spending on imports M
(some of the spending by
households, firms and
government is on imports so we
need to subtract this from our
calculation)
GDP and GNP
GDP is different to GNP/ GNI
• GDP- The total income generated within a
domestic economy, regardless of the
nationality of the owners of the factors of
production, without making deductions for
depreciation of the domestic capital stock
• GNP- The total income accruing to citizens
of a country, regardless of the country in
which the income was generated, without
making deductions for depreciation of the
domestic capital stock
GNP
GNP = GDP + Net Property Income from
Abroad
(NPIA is the net balance of interest,
profits and dividends (IPD) coming into
the UK from UK assets owned overseas
matched against the flow of profits and
other income from foreign owned assets
located within the UK)
GDP & GNP (Gross National Product)
• Countries which have a lot of foreign
investors will see a lot of the income
generated flow out of the country.
• In the UK, Toyota have factories that
generate profit. This profit is included
in calculations of GDP for the UK
• It is not included in calculations of GNP
GDP & GNP
• Likewise, UK companies have investments
abroad.
• The profit these companies make abroad is
not included in GDP but is included in its GNP
• GDP The total income made in a domestic
economy (one geographical area)
• GNP The total income accruing to citizens of
a country, regardless of the country in which
the income was generated
Handout
• Economic Growth
• ET Nov 2003
Nominal GDP and Real GDP
• Nominal GDP is the value of output measured in
terms of the prices that prevail at the time of
measurement. GDP at ‘current prices’
• Real GDP is the value of output adjusted for
changes in the price level. GDP at ‘constant prices’.
I. e they are adjusted for the level of inflation.
• Real GDP is used to compare changes in output from
one year to another.
• If we did not use real GDP to calculate economic
growth we may think output has risen when in fact
only the price of the output has risen.
• We use NI figures to calculate economic
growth and use as a guide as to the
standard of living.
• We usually adjust GDP/ GNP figures so
that we have a figure per head of the
population (per capita).
• Thus is GDP per capita rises we may
assume the standard of living has risen for
the population.
• However there are many issues with NI
statistics…
Handout
• Using the article and your own thoughts
list the problems associated with using
GDP to measure economic growth and
the ‘standard of living’
Issues of using NI statistics
• Do not include non- marketed output eg. DIY and housework
• Do not include output sold in underground markets (parallel/ black
market)
• Do not take into account quality improvements
• Do not account for negative externalities
• Do not account for resource depletion
• Do not account for different price levels in different countries
• Does not account for types of goods- military or merit goods
• Does not reflect education and health (important when
considering the ‘standard of living’)
• Does not reflect income distribution
• Does not take into account leisure time
• Does not account for other factors important to judge the quality
of life eg. Political freedom, crime rates
• You will return to this when you look at measures of development
Advantages and Disadvantages of
Economic Growth
• Using the article and your textbook list
the
• advantages and disadvantages of
economic growth
• Sources of economic growth (s/t and
l/t)