Measuring Economic Activity

Measuring National IncomeNational Income= Total Income of an Economy= Total Output

Most common measure is GDP…

expenditure

income

output

Recall…

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)