In this video we’ll learn about the terms GDP, GNP and GNI.
We’re also going to cover three approaches to measuring GDP and examine what is not included
in its measurement.
Finally, we’ll look at what is meant by money GDP, real GDP and GDP per capita.
Gross domestic product measures the value of all final goods and services produced within
a country’s borders in a specific amount of time, usually a year.
Gross means all.
Domestic means within the country’s borders.
It does not matter if the firm or worker is not a citizen, their earnings within the country
are counted towards its GDP.
The earnings of Japanese workers and firms located in China count towards China’s GDP,
not Japan’s.
Product = production of final goods and services.
This means we only count final products, not intermediate goods.
This is done to avoid double counting.
The final value of a car is included in GDP but not also the value of the tires, glass
and metal used in production otherwise this would provide an inflated sense of the size
of the economy.
GDP can be measured using three approaches:
1.Expenditure method – measures the value of spending on goods and services produced
(unsold goods are added to stocks) 2.Income method – measures the income earned
by the factors of production (wages, interest, rent and profit)
3.Output method – measures the final value of output produced across industries
Essentially, what is spent should equal what is earned and also equal what is produced.
Each of these three methods should arrive at the same answer.
It’s important to state what GDP does not measure as well.
The shadow economy which includes economic activity that is not recorded by the government.
This could include cash in hand work, illegal economic activity such as drug dealing, or
undeclared business profits.
Depending on the country, the shadow economy can be a quite large component of economic
activity in a country.
Since it is not easy to track, it is hard to measure and harder to tax.
The sale of used goods – GDP only includes the sale of new goods, not second hand or
used goods.
The sale of financial assets (stocks, bonds, etc.)
The distribution of income – GDP gives us a measure of national income, but does not
tell us how it is distributed amongst society.
Population adjustments – GDP is the total value of a country’s output and does not
reflect changes in the population or the size of the population for that matter.
Environmental damage - damage to the environment is not counted, however large scale industrial
production that harms the environment is.
Transfer payments such as unemployment and social security are not included in GDP.
If you receive a cash birthday gift, this is also not counted in GDP.
There is nothing new created in return for these payments.
Let’s next take a look at some scenarios and see how well you’ve understood this
topic so far.
In the following examples, determine whether or not the transaction is measured as part
of GDP.
At the next slide, pause the video and try to answer the questions on your own before
continuing.
Consider these five scenarios and choose your answer.
Pause the video now and the answers will be up in 3 seconds.
For number one, it is the purchase of a financial asset so it is not included in GDP.
Number two is the purchase of a good so it is included in GDP.
Number three is a purchase of an existing product from its original owner, so it is
second hand and therefore not included in GDP.
Roberto’s work at the barbershop earns him an income and is taxed, but his haircut at
home for his young son does not count in GDP as its likely that Roberto’s son did not
pay for the haircut, we hope.
Sam likes Microsoft Office so he purchases a one year subscription.
This gives him access to the MS Office service and software so it is counted in GDP.
Hopefully you were able to get many, if not all of these correct.
Next we’ll look at some more terms related to GDP.
Money (nominal) GDP – is the value of GDP at current prices.
You use current prices to calculate the value of all goods and services produced.
This will give you your money or nominal GDP.
Real GDP – the value of GDP when adjusted for inflation.
We really care about this number when comparing the performance of an economy over time and
to other countries.
Real GDP gives us an accurate picture of how an economy is truly performing.
For example, if prices have doubled and nominal GDP has doubled, real GDP has actually stayed
the same.
However if prices have remained the same and nominal GDP has doubled, then there has been
a doubling of real GDP.
Real GDP per capita – the value of real GDP divided
by the size of the population.
Countries with identical real GDP may have very different real GDP per capita depending
on their populations.
China and the US are the top 2 economies in the world as measured by real GDP.
However, the real GDP per capita, or per head in the USA is by far much larger due to the
size of the Chinese population.
It’s time again for you to practice.
Complete the following table with the missing information.
Using the information provided in columns A through C, calculate real GDP and real GDP
per capita for country A and B. Pause the video here and the answers will display in
3 seconds.
Country A’s real GDP is $1000.
If their money GDP is currently $1100 and they experienced 10% inflation previously,
we know some number X times 1.1 is equal to $1100.
If we divide $1100 by 1.1 we would get $1000.
Similarly for Country B we know some number X times 1.05 equals $2100 such that real GDP
must be $2000.
To calculate real GDP per capita divide real GDP by the population of each country and
you should get the respective figures shown.
Gross national income plays a brief but important role in this chapter.
The accepted definition for this syllabus is the same as the accepted definition by
the World Bank and IMF.
It is considered to be identical to gross national product, or GNP.
GNI is equal to GDP + net factor income from abroad
The net factor income of the UK includes the payments received by the UK’s factors of
production (land, labour, capital and enterprise) regardless of where they are located in the
world minus payments made to other country’s factors of production located within the UK.
For example, Tesco is a British grocery store that operates both in the UK and abroad.
Their economic activity abroad would count in the UK’s GNI but not the UK’s GDP.
We’ve gone through a lot of information in this video so if you have any questions
or comments, leave them below and let’s try and answer them together.
That’s us done for now and I will see you in the next one!