Macro Theme 2.1.1

What does national income accounting measure?

It measures economic activity within a country and gives insights into national performance.

What is GDP?

GDP (Gross Domestic Product) is the value of all goods and services produced in an economy in a one-year period.

What are the three ways to measure GDP?

The expenditure approach, the income approach, and the output approach.

What is the expenditure approach to GDP?

It adds up consumption, investment, government spending, and net exports (exports - imports).

What is the income approach to GDP?

It adds up the rewards for the factors of production: wages, rent, interest, and profit.

Why should expenditure and income approaches to GDP equal each other?

Because one party's expenditure is another party's income.

What is the difference between value and volume of GDP?

Value is the monetary worth; volume is the actual quantity of goods and services.

What is nominal GDP?

GDP not adjusted for inflation — the actual value of goods and services produced in a year.

What is real GDP?

GDP adjusted for inflation — reflects the actual increase in output.

Example of real GDP calculation

If nominal GDP is £100bn and inflation is 10%, real GDP is £90bn.

What is GDP per capita?

GDP divided by the population — shows the average output or income per person.

Why use GDP per capita?

It allows better comparison of living standards between countries.

What does "GDP at constant prices" refer to?

Real GDP — adjusted for inflation.

What does "GDP at current prices" refer to?

Nominal GDP — not adjusted for inflation.

What is Gross National Income (GNI)?

GNI is the total income earned by a country’s residents and businesses, regardless of where that income is earned.

How is GNI calculated from GDP?

GNI

What is included in income from abroad in GNI?

Wages earned abroad, interest/dividends on investments, remittances, etc.

What is included in income paid to foreigners in GNI?

Profits repatriated by foreign firms, interest to foreign investors, wages to foreign workers, etc.

Why use GNI instead of GDP?

GNI provides a better measure of residents' economic well-being and income received.

What is GNI per capita?

GNI divided by the population — reflects average income received by each person.

Why is GNI/capita more realistic than GDP/capita?

Because it accounts for cross-border income flows and better reflects personal income.

How are national income statistics useful?

They allow comparisons between countries, time periods, and help evaluate government policy effectiveness.

Why is real GDP better than nominal GDP for comparisons?

It accounts for inflation and shows real changes in output.

Why is real GDP/capita better than real GDP?

It considers population differences when comparing living standards.

Why is real GNI/capita better than GDP/capita?

It shows actual income received per person, including income from abroad.

Why might GNI differ from GDP in developing countries?

Because multinational companies extract resources and repatriate profits, reducing GNI.

Why is the gap between GNI and GDP smaller in developed countries?

Developed countries have more domestic ownership of production and fewer outbound profit flows.

What is PPP (Purchasing Power Parity)?

PPP is a conversion factor used to compare the purchasing power of different currencies across countries.

What does PPP show?

It shows how many units of a country’s currency are needed to buy the same basket of goods as $1 would buy in the USA (or another country).

Why use PPP when comparing countries?

To account for cost of living differences and provide more accurate comparisons of standards of living.

Example of PPP: Vietnam vs USA

If the same basket of goods costs $150 in Vietnam and $450 in the USA, the PPP is 1:3.

What does a 1:3 PPP ratio suggest?

The cost of living is three times higher in the USA than in Vietnam.

What could higher PPP-adjusted GNP/capita in the USA suggest?

That citizens in the USA enjoy a higher standard of living.

What could lower PPP-adjusted GNP/capita in the USA suggest?

That Vietnamese citizens may enjoy a higher standard of living as they spend less to buy the same goods.

Exam Tip: What does 'at constant prices' mean?

It refers to real GDP — adjusted for inflation.

Exam Tip: What does 'at current prices' mean?

It refers to nominal GDP — not adjusted for inflation.

Exam Tip: What pattern is common in GNI vs GDP data for developing countries?

GNI is often much lower due to income/profit outflows by foreign firms.

Exam Tip: What pattern is common in developed countries for GNI vs GDP?

The difference is smaller because most production and profits remain domestic.