Definitions:
- GDP – Gross Domestic Product is the value of total output produced in an economy over a period of time.
- GNI – Gross National Income is the value of total output produced in an economy over a period of time and net income from abroad taken into account. (GNI = GDP + net income from abroad)
- GNP – Gross National Product is the value of total output produced in an economy over a period of time, net income from abroad taken into account and depreciation (also known as capital consumption) taken away. (GNP = GNI – depreciation)
- “Green” GDP – Gross Domestic Products that takes into account the monetary value of loss of biodiversity, damage done (costs) to the environment. (Green GDP = GDP – costs to the environment)
3 methods to calculate GDP:
- Income: Wages + Rent + Interest + Profit
- Output: sum of 1st, 2nd, 3rd sectors’ outputs
- Expenditure: C + I + G + (X – M) (see below)
Higher level students need to know how to calculate the national income using the expenditure approach:
GDP = C + I + G + (X – M), where:
C – Consumption
I – Investment
G – Government expenditure
X – Exports
M – Imports
This will give you GDP at market prices. To get GDP at factor costs you add subsidies and take away taxes:
Factor costs = market prices + subsidies – taxes (indirect e.g. VAT)
Problems with using GDP as a measure for economic activity:
- GDP does not take into account negative effects on the environment such as pollution or use of natural resources
- Shadow economy (also known as black markets) is not taken into account including those working illegally
- People who are doing unpaid work (volunteering or within a family) are not included
- Everything that is produced and consumed by people themselves is not included in GDP (e.g. potatoes grown by Smith and consumed by his family are left unrecorded)
- Improvements in the quality of output produced are not considered
