3.1.2 National Income Terminology & Calculations

• Nominal GDP measures the value of production within a country's borders
  • However, many countries host multi-national corporations whose profits are  included in the GDP figures, even though they usually send their profits out of the country
  • Likewise, citizens of a home nation make profits in other countries (included in their GDP statistics) and return these profits home (Remittances can be a significant income source for many developing nations)
     
• Gross national income (GNI) is therefore a more relevant metric in that it measures the nominal GDP + the net factor income earned from abroad

Step 1:  Determine which of the data presented is relevant to the calculation

GDP = C + I = G = (X-M)

GNI = GDP + Net Income

So income tax is not relevant (it is a leakage) 

Step 2: Substitute the relevant values into the GDP formula

GDP = C + I + G + (X-M)

GDP = 11255  + 8927 + 15697 + (8532 - 4957)

Nominal GDP = $39,454 million

Step 3: Substitute the relevant values into the GNI formula

GNI = GDP + Net Income

GNI = 39,454 + 4349

GNI = $43,803 million

(3 Marks for the correct answer or two marks for the correct GDP or 1 mark for any correct working in the process)

• In economics, the use of the word nominal refers to the fact that the metric has not been adjusted for inflation
• Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period
  • There has been no adjustment to the amount based on the increase in price levels (inflation)
    
    
• Real GDP and GNI is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
  • For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
    
    
• Real GDP and GNI are often calculated using a price deflator known as the GDP deflator
• The GDP deflator is used to convert nominal GDP/GNI  from current prices to constant prices
   
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• Real GNI = Real GDP + Net income from abroad

Step 1:  Substitute the values from 2020 into the equation

(Two marks for the correct answer or 1 mark for any correct working in the process. Answer needs to be rounded to 2 decimal places where appropriate)

Step 2:  Substitute the values from 2021 into the equation

(Two marks for the correct answer or 1 mark for any correct working in the process. Answer needs to be rounded to 2 decimal places where appropriate)

• Real GDP per capita = Real GDP / the population
  • It shows the mean wealth of each citizen in a country based on the value of GDP
  • This makes it easier to compare standards of living between countries 
    • E.g. Switzerland has a much higher Real GDP/capita than Burundi
  • If a country has a real GDP value of $124 billion and its population is 42 million, we can calculate the real GDP/capita as follows
     

• Real GNI per capita = Real GNI / the population
  • It shows the mean wealth of each citizen in a country based on the value of GNI
  • It provides a better comparison of the standards of living between countries than real GDP/capita
  • If a country has a real GNI value of $129 billion and its population is 42 million, we can calculate the real GNI/capita as follows 

• Purchasing power parity (PPP) is a conversion factor that can be applied to GDP and GNI
• It calculates the relative purchasing power of different currencies
  • It shows the number of units of a country's currency that are required to buy a product in the local economy, as $1 would buy the same product in the USA 
    
• The aim of PPP is to help make a more accurate standard of living comparison between countries where goods/services cost different amounts
  
  
• If a basket of goods costs $150 in Vietnam (once the currency has been converted) and the same basket of goods costs $450 in the USA, the purchasing power parity would be 1:3
  • It seems like the cost of living is much higher in the USA
  • However, if the USA's GNI/capita is more than three times higher than the GNI/capita of Vietnam, it could be argued the USA has better standards of living
  • Conversely, if the GNI/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services