Different Measures of National Income I A Level and IB Economics

Summary

This 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

• 📈 GDP stands for Gross Domestic Product and measures the total value of goods and services produced within a country's borders.
• 💰 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.
• 🔄 The formula for calculating Real GDP is: (Money value of GDP in current year) / (Price index of current year) * 100.
• 📊 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.
• 🌐 GNI (Gross National Income) measures the value of incomes from UK-owned factors of production, whether they are located in the UK or overseas.
• 🌍 GNI is considered a better indicator of a country's living standards as it includes income from overseas investments.
• 🏙️ 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.
• 💲 Purchasing Power Parity (PPP) adjusts for differences in the cost of living between countries, allowing for a more accurate comparison of living standards.
• 🌐 International GDP comparisons often use PPP adjustments to account for the cost of living and currency exchange rates.
• 📉 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

00:00

📈 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.

05:02

🌍 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.

10:04

💹 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.

Keywords

💡Gross Domestic Product (GDP)

GDP is a measure of the total value of goods and services produced within a country's borders over a specific time period. It is a key indicator of a country's economic health and size. In the video, GDP is differentiated into nominal and real GDP to illustrate how economic data can be adjusted for inflation, providing a more accurate reflection of economic growth.

💡Nominal GDP

Nominal GDP refers to the market value of all the final goods and services produced in an economy within a given period, without adjusting for inflation. It reflects the current prices of goods and services. The video uses the example of buying a meal deal at today's prices to explain nominal GDP.

💡Real GDP

Real GDP is the value of a country's output adjusted for inflation, allowing for a comparison of the physical volume of goods and services produced over time. It is calculated by deflating the nominal GDP using a price index, such as the Consumer Price Index. The video demonstrates how to calculate real GDP using an example with given inflation rates and GDP values.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video discusses how inflation affects the calculation of real GDP, as it needs to be considered when adjusting nominal GDP figures to reflect the actual volume of goods and services produced.

💡Consumer Price Index (CPI)

CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is used to understand the impact of inflation on purchasing power and is crucial in adjusting nominal GDP to real GDP. The video mentions CPI in the context of calculating real GDP.

💡Economic Growth

Economic growth refers to the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. The video uses real GDP as a measure to analyze economic growth, highlighting the importance of adjusting for inflation to accurately gauge growth.

💡Gross National Income (GNI)

GNI measures the total value of incomes flowing to a country's residents from both domestic and foreign sources. It is considered a better indicator of a country's living standards than GDP because it includes income from overseas investments. The video provides an example of Hong Kong, where GNI is larger than GDP due to significant income from overseas investments.

💡Per Capita GDP

Per capita GDP is the total GDP divided by the number of residents in a country, providing a measure of the average economic output per person. The video discusses per capita GDP in the context of comparing economic wealth across different regions within a country, highlighting disparities in economic well-being.

💡Purchasing Power Parity (PPP)

PPP is an economic theory that compares different countries' currencies through a 'basket of goods' approach. It is used to determine the relative value of currencies and to compare economic data across countries. The video explains how PPP adjustments can affect the interpretation of GDP figures, making them more reflective of the actual purchasing power of residents.

💡Recession

A recession is a significant decline in economic activity that lasts more than a few months, typically visible in real GDP figures. The video references the impact of the global financial crisis and the pandemic on real GDP, illustrating how recessions can be identified and measured through economic data.

💡Regional Variations

Regional variations refer to the differences in economic conditions, such as income levels, across different areas within a country. The video uses the example of the UK, showing how per capita income can vary significantly between regions like London and the Northeast, emphasizing the importance of considering regional data in economic analysis.

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