Different Measures of National Income I A Level and IB Economics
Summary
TLDRThis educational video delves into the intricacies of national income measures, focusing on the distinction between nominal and real GDP. It explains that nominal GDP reflects current prices without inflation adjustment, while real GDP adjusts for inflation, providing a more accurate picture of economic growth. The video guides viewers through calculating real GDP using a price index and illustrates the concept with a practical example. It also touches on Gross National Income (GNI), emphasizing its significance as an indicator of living standards. The discussion includes the importance of per capita income and the impact of purchasing power parity (PPP) on international income comparisons, highlighting the need for PPP adjustments to accurately assess living standards across different countries.
Takeaways
- đ GDP stands for Gross Domestic Product and measures the total value of goods and services produced within a country's borders.
- đ° Nominal GDP is calculated using current prices and does not account for inflation, while Real GDP adjusts for inflation to reflect the actual change in economic output.
- đ The formula for calculating Real GDP is: (Money value of GDP in current year) / (Price index of current year) * 100.
- đ Real GDP is a more accurate measure of economic growth as it accounts for inflation, showing changes in the quantity of goods and services produced.
- đ GNI (Gross National Income) measures the value of incomes from UK-owned factors of production, whether they are located in the UK or overseas.
- đ GNI is considered a better indicator of a country's living standards as it includes income from overseas investments.
- đïž Regional variations in GDP per capita can highlight economic disparities within a country, such as the difference between London and the Northeast in the UK.
- đČ Purchasing Power Parity (PPP) adjusts for differences in the cost of living between countries, allowing for a more accurate comparison of living standards.
- đ International GDP comparisons often use PPP adjustments to account for the cost of living and currency exchange rates.
- đ The impact of the COVID-19 pandemic on the UK's real GDP was significant, with a notable drop in 2020 followed by an expected recovery.
Q & A
What is the difference between nominal and real GDP?
-Nominal GDP is the value of output at current prices, not adjusted for inflation, while real GDP adjusts the level of spending and output using a consumer price index, which means it considers the effects of inflation and is seen as a better guide to changes in the quantity of goods and services produced.
How is real GDP calculated?
-Real GDP is calculated by taking the money value of GDP in a given year, multiplying it by 100, and then dividing by the price index for that year. For example, if the money value of GDP in 2021 is $4,500 million and the price index is 103 due to a 3% inflation, the real GDP is calculated as $4,500 million * 100 / 103.
Why is real GDP considered a better measure of economic growth than nominal GDP?
-Real GDP is considered a better measure of economic growth because it accounts for inflation, which can distort the value of goods and services over time. By adjusting for inflation, real GDP provides a more accurate reflection of the actual volume of goods and services produced.
What is the significance of the chart showing real GDP and nominal GDP?
-The chart showing real GDP and nominal GDP is significant because it illustrates how real GDP grows more slowly than nominal GDP due to the adjustment for inflation. This helps in understanding the true economic growth by factoring out the price changes.
How does the video script describe the impact of the pandemic on the UK's real GDP?
-The video script describes the impact of the pandemic on the UK's real GDP by mentioning a significant loss of 10 percent in 2020, highlighting the depth of the economic downturn caused by the pandemic.
What is Gross National Income (GNI) and how does it differ from GDP?
-Gross National Income (GNI) measures the final value of incomes flowing to a country's owned factors of production, regardless of whether they are within the country or overseas. It differs from GDP in that GNI includes net property income from overseas, such as interest, profits, dividends, and rental income earned by the country's nationals abroad.
Why is GNI considered a better indicator of a country's living standards than GDP?
-GNI is considered a better indicator of a country's living standards because it includes income from overseas investments, which can significantly contribute to the income of a country's residents, thus providing a more comprehensive picture of the country's economic well-being.
What is the significance of measuring GDP per capita?
-Measuring GDP per capita is significant because it provides a way to compare the economic output of a country on a per person basis, which can indicate the average standard of living and economic well-being of the population.
How does the video script explain the concept of purchasing power parity (PPP)?
-The video script explains purchasing power parity (PPP) as a measure of how many units of one country's currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency. It adjusts for differences in the cost of living between countries, allowing for a more accurate comparison of economic standards.
What is the importance of PPP adjustments in international economic data?
-PPP adjustments are important in international economic data because they account for differences in the cost of living across countries, allowing for a more accurate comparison of living standards and economic output. Without PPP adjustments, countries with higher living costs might appear less prosperous than they actually are.
How does the video script illustrate the impact of PPP adjustments on GDP per capita figures?
-The video script illustrates the impact of PPP adjustments by comparing nominal GDP per capita with PPP-adjusted GDP per capita for countries like India. It shows that without PPP adjustments, the GDP per capita of India would be significantly lower, but with PPP adjustments, it reflects a higher standard of living due to the lower cost of living in India compared to the benchmark country.
Outlines
đ Understanding GDP and Economic Growth
This paragraph introduces the concepts of nominal and real GDP, which are key measures of a country's economic performance. Nominal GDP calculates the total value of goods and services at current prices, without adjusting for inflation. In contrast, real GDP adjusts for inflation using a consumer price index, providing a more accurate reflection of changes in the quantity of goods and services produced. The example given calculates real GDP for 2021 using the money value of GDP for that year and the inflation rate. The paragraph also discusses how real GDP can be used to measure economic growth, with a focus on the UK's economic performance over several decades, including the impact of the pandemic.
đ Gross National Income (GNI) and Per Capita GDP
The second paragraph delves into Gross National Income (GNI), which measures the value of incomes from UK-owned factors of production, whether they are located domestically or overseas. GNI is considered a better indicator of a country's living standards than GDP. The paragraph provides an example of Hong Kong, where GNI is higher than GDP due to significant income from overseas investments. It also discusses per capita GDP, which divides a country's GDP by its population to give a per-person figure. Data for various countries and regions within the UK is presented, highlighting disparities in per capita income.
đč Purchasing Power Parity (PPP) and Its Impact
The final paragraph discusses Purchasing Power Parity (PPP), a measure that adjusts for differences in the cost of living between countries. PPP is calculated by determining how many units of a country's currency are needed to purchase the same basket of goods as a given amount of another currency. This adjustment is important for comparing economic data across countries with different cost of living standards. The paragraph provides examples of how PPP adjustments can affect the GDP per capita figures for countries like India and Norway, emphasizing the importance of understanding PPP when interpreting international economic data.
Mindmap
Keywords
đĄGross Domestic Product (GDP)
đĄNominal GDP
đĄReal GDP
đĄInflation
đĄConsumer Price Index (CPI)
đĄEconomic Growth
đĄGross National Income (GNI)
đĄPer Capita GDP
đĄPurchasing Power Parity (PPP)
đĄRecession
đĄRegional Variations
Highlights
Gross Domestic Product (GDP) measures the total value of a country's output of goods and services produced within its borders.
Nominal GDP reflects the value of output at current prices without adjusting for inflation.
Real GDP adjusts for inflation, providing a more accurate measure of economic growth by considering the effects of price changes.
Calculating Real GDP involves using a base year's price index to deflate current year's nominal GDP.
An example calculation shows how to convert nominal GDP to real GDP using a price index.
Real GDP growth is typically slower than nominal GDP growth due to the deflationary effect of adjusting for inflation.
Gross National Income (GNI) measures the value of incomes flowing to a country's factors of production, whether domestic or overseas.
GNI is considered a better indicator of a country's living standards as it includes income from overseas investments.
Hong Kong's GNI is larger than its GDP due to significant net property income from overseas investments.
Per capita income is calculated by dividing a country's GDP by its resident population.
Regional variations in per capita income can be significant, as seen in the UK with London having the highest per capita income.
Purchasing Power Parity (PPP) adjusts GDP for differences in the cost of living between countries.
PPP conversion factors help compare the affordability of goods and services across different countries.
PPP adjustments can significantly alter GDP per capita figures, as seen with India's adjusted figure being much higher than the nominal one.
Understanding PPP is crucial for interpreting international economic data accurately.
The video concludes with a reminder of the importance of revising different measures of national income and growth.
Transcripts
okay hi there welcome to a macro video
we're going to revise
uh different measures of national income
and how it relates to a country's
economic growth
first thing to think about is the
difference between nominal versus real
gdp
gdp of course stands for gross domestic
product and it measures the total value
of the national output of goods and
services produced in a given time period
and crucially it's the value of the
output of goods and services
supplied produced within
the geographical borders of a country
now nominal or money gdp
is the value of output at today's prices
at current prices if i go to the
supermarket and buy a meal deal for
let's say four pounds
sandwich some crisps and a can of coke
or something for four pounds that is the
value of spending at today's prices it's
not adjusted for inflation
whereas real gdp
does adjust the level of spending and
output income
using a consumer price index
and that means if you get the data in
real terms the effects of inflation
have been considered and it's normally
seen as a better guide to changes in the
volume or the quantity of goods and
services
that have been produced
now in exams you will need to know how
to calculate real gdp from the data
given so here's a quick example
consider the money value of a country's
gdp to be four thousand million dollars
or four billion dollars
in 2020 now in 2021 the value of gdp
goes up to 4500
quite a significant increase but over
the year there's also been some
inflation we're going to assume in
inflation of 3
so that causes the general index or the
general price level to go up from 100
the base year value in 2020 to 103.
so then how do we calculate real gdp
well you could always have a go of
course
if you want to press the pause button
have a go and then check through the
answer with me in a second or two
so the value of real gdp in 2021 is
calculated thus it's the money value of
gdp in 2021 which we know to be 4 500
million dollars
multiplied by 100 divided by the price
index for that year we've had three
percent inflation so the index goes up
to 103. and if you do the maths
think you get the answer
of 43169
million dollars
and instead of that being at current
prices that's measured at constant 2020
prices so real gdp is inflation-adjusted
data this chart actually is quite handy
quite useful it shows both gdp in real
terms in blue
and gdp and nominal money terms in
orange and you can see that real gdp
grows
less quickly or more slowly
than normal gdp because of course we're
taking inflation into account we're
deflating the data
because of price inflation
so nominal data gives monetary values
also known as money gdp not inflation
adjusted expressed at current prices
today's prices
whereas real gdp is adjusted for
inflation
we we hold prices at the level of a
chosen base year
and therefore the gdp data in real terms
is expressed at constant prices
and real gdp can then be used as a
measure of economic growth here's the
data is the annual growth of gdp in real
terms for the uk from 1949 all the way
through
to 2020 so effectively during the 70
year worth of data you can see the
economic cycles
and you can see the times when the uk
went into recession
but crucially i think you can see the
depth of the impact of the pandemic on
real gdp for the uk
just looking at the last 10 or 12 years
2009 of course was the year of recession
after the global financial crisis
then a decade or so of slow
but positive growth
and then a loss of 10 percent of gdp in
the uk
in 2020 with a with a fairly you know
sharp recovery expected of course a lot
of uncertainty as to how 2021 will turn
out
another measure of national output or
national income you need to be aware of
for most exam boards is gross national
income or gni
and that measures the final value of
incomes flowing to
in our case uk owned factors of
production regardless of whether they're
in the uk or overseas
and gdp equals sorry gni
whose national income
equals gdp plus
net property income from overseas so
that is
primary income property income from
things like interest on savings
profits from the profits of companies
located overseas
dividends and things like rental income
so it's basically investment income from
the assets that the country's nationals
earn overseas
and gni is now widely regarded as the
best indicator of the country's living
standards
although it doesn't technically record
transfers such as remittance incomes
and here's a good example of a country
hong kong whose gni is actually bigger
than their gdp
uh there's the figures for
gdp gurus think of hong kong that's in
hong kong dollars i think the hong kong
dollar is fixed against the us dollar
about eight and a half
dollars to the uh hong kong dollars to
the us dollar so divide by about eight
to get the us figure
but hong kong has a high gross national
income it's a high income country in
part because of the big net inflow of
property income from their overseas
investments
another little tweak you need to do when
you get the data of course is to measure
things in per capita terms capital
income of course is just simply the
level of gdp divided by a country's
resident
population and here's the data for 2020
these are the countries in the world
with the highest
gdp and dollars per capita luxembourg
and switzerland right up there along
with ireland aren't that one of the
richest countries
in the european union
uh those are countries that's per capita
gdp
here's another way of expressing some
data this is gdp per capita in the uk
and then we divide it we subdivide it by
region
quite interesting now you can see london
way out ahead in terms of its per capita
incomes
but then there's a whole clutch of
countries with a per capita income of
less than 30
000 pounds per year indeed per capita
income in the northeast according to
this measure
is um under half under half the figure
for london
and only about what 65 70 of the figure
for the uk as a whole so they're quite
big regional variations
in per capita income
however the other one which we need to
think about in revision is the concept
of measuring
regional
national gni or gdp data at purchasing
power poverty or ppp so let's just
finish off by thinking about
this for a moment or two
ppp stands for purchasing power parity
and it's basically a measure of
how many units in one
country
country's currency are needed to buy the
same
basket of goods and services as can be
bought with a given amount of another
currency
so for example it's essentially saying
that what will a thousand dollars buy
you in hong kong what will a thousand
dollars buy you in
south africa
um with the with the land as their
currency what will a thousand dollars
buy you in london compared with perhaps
glasgow
uh purchasing power power it is the idea
that items should more or less cost the
same in different countries based on the
exchange rate at the time because they
don't um because
exchange rates are rarely at their ppp
level
in some countries for example the cost
of living is fairly high think about
countries such as norway or denmark or
sweden or switzerland where relative
living costs are much higher
and the thousand dollars probably won't
buy you anything like the same quantity
of goods and services
that you could buy in countries such as
for example india or south africa
or
vietnam for example so international
data on national income is often subject
to a p
p p adjustment
and here's some data for
2019 i think expressed a constant
2017 prices
it's in u.s dollars and it's ppp
adjusted you can see
this is the size of an economy so
luxembourg has a very very high gdp per
capita because it's a tiny economy
compared to the united states the uk
germany and other countries
and here's a way of expressing the the
living standards in terms of gdp per
capita
in real terms
again in u.s dollars but adjusted for
ppp
[Music]
so norwegian gdp per capita 63 633 us
dollars if they didn't make a ppp
adjustment of course that figure would
be higher
because norwegian living costs are
noticeably higher than the united states
for example
just a really good example of this
india has a conversion factor for ppp of
approximately 0.3
might even be a little bit less than
that
well what does this mean it means that
if you take the gdp per capita of india
in nominal terms
uh it's about just over 2 000
uh dollars
at current prices but when you make a
ppp adjustment your conversion factor
you divide by around 0.3 but a bit less
than that in fact
and that means that gdp per capita for
india ppp
the latest figures i have
over seven thousand dollars
per capita you can see the impact of the
ppp adjustment
uh for india and you normally take the
united states
consumer price index or general price
level as your benchmark or your basis
for the calculation
now you won't have to calculate ppp
stuff in the exam but you do need to be
aware of what it means and how perhaps
you can interpret
the data so it's well worth practicing
and having having a look at
some data response questions
well there we go there was a quick video
on different measures of national income
and growth thanks for joining in as
always we always appreciate it take care
stay safe and see you again
sometime soon
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