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    Econ Macro Ch.1-11

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    Waiwa Ngai
    This document defines key macroeconomic concepts including GDP, GNI, RPUs, and approaches to measuring economic performance. It discusses what is included and excluded from GDP calculations, such as excluding transfer payments and including illegally produced goods. GDP can be measured using production, expenditure, and income approaches. GNI includes net income from abroad. Limitations of these statistics are also outlined, such as failing to account for non-market activities or income distribution.

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    Econ Macro Ch.1-11

    Uploaded by

    Waiwa Ngai
    24 views5 pages
    This document defines key macroeconomic concepts including GDP, GNI, RPUs, and approaches to measuring economic performance. It discusses what is included and excluded from GDP calculations, such as excluding transfer payments and including illegally produced goods. GDP can be measured using production, expenditure, and income approaches. GNI includes net income from abroad. Limitations of these statistics are also outlined, such as failing to account for non-market activities or income distribution.

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    This document defines key macroeconomic concepts including GDP, GNI, RPUs, and approaches to measuring economic performance. It discusses what is included and excluded from GDP calculations, such as excluding transfer payments and including illegally produced goods. GDP can be measured using production, expenditure, and income approaches. GNI includes net income from abroad. Limitations of these statistics are also outlined, such as failing to account for non-market activities or income distribution.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views5 pages

    Econ Macro Ch.1-11

    Uploaded by

    Waiwa Ngai
    This document defines key macroeconomic concepts including GDP, GNI, RPUs, and approaches to measuring economic performance. It discusses what is included and excluded from GDP calculations, such as excluding transfer payments and including illegally produced goods. GDP can be measured using production, expenditure, and income approaches. GNI includes net income from abroad. Limitations of these statistics are also outlined, such as failing to account for non-market activities or income distribution.

    Copyright:

    © All Rights Reserved
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    of 5

    Economics — Macroeconomics

    Chapter 1: Measurement of economic performance (I) — GDP and GNI

    1. Gross domestic product (GDP)


    (a) Definition
    - GDP is the total value of production of all resident producing units of an economy during a specific period.

    (b) Items not included in GDP


    (i) Items not involving production (i.e. no production → not counted in GDP)
    Items Explanations
    Transfer payment - They are only money transfers, not payments for production.
    Capital gain - It refers to an increase in the market value of an asset and not generated from
    production.
    Financial assets - They are intangible assets which allow owners to receive a payment from other units.
    - Purchase prices are not payments for production
    Second-hand goods - They already exist in the economy and their transactions do not involve production.

    (ii) Items not produced by RPUs (e.g. imported goods and services)

    (iii) Items not produced in the specific period (e.g. past inventories)

    (iv) Items that are difficult to estimate the monetary value (e.g. unpaid services produced by household)

    (c) Items that are counted in GDP


    - Values of illegal (e.g. smuggling and piracy), unreported (e.g. private tutors and hawkers) or non-market
    (e.g. agricultural products for self-consumption) production

    2. Resident producing units (RPUs)


    (a) Definition
    - A producing unit is considered as a resident producing unit in an economy it maintains a centre of predominant
    economic interest in the economic territory of that economy.

    (b) Conditions for being a RPU


    (i) An individual
    - He has to remain in the economy for at least 12 months or intend to do so, regardless of his nationality.

    (ii) An orgaisation
    - It ordinarily operates in the economy.

    3. Equivalence of the approaches to measuring GDP

    Economics — Macroeconomics Page 1


    4. Approaches to measuring GDP — Production approach
    (a) Value-added
    - The value-added of a producing unit measures its contribution to production.
    - Value-added = Value of output – Value of intermediate consumption

    (b) How to calculate GDP by value-added


    - GDP = Sum of value-added of all RPUs

    (c) GDP at market prices and factor cost


    - GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies
    - GDP at factor cost = GDP at market prices – Indirect taxes + Subsidies

    5. Approaches to measuring GDP — Expenditure approach (C + I + G + X – M) / (C + I + G + NX)


    (a) Expenditure component
    (i) Private consumption expenditure (c)
    - final expenditure of domestic households

    (ii) Gross investment expenditure


    - final expenditure of domestic firms

    - Changes in inventories = Changes in stock


    - Depreciation = Capital consumption = Capital consumption allowances
    - ‘Gross’ = Depreciation included
    - ‘Net’ = Depreciation excluded
    - ‘Fixed’ = Changes in inventories excluded

    (iii) Government consumption expenditure (G)


    - It is usually measured at cost since most of their products are not for sale in the market.

    (iv) Net exports (NX)


    - Exports = Exports of goods + Exports of services
    = Domestic exports of goods + Re-exports of goods + Exports of services
    - Imports = Imports of goods + Imports of services
    - Net exports = Total exports – Total imports
    = Net exports of goods + Net exports of services
    - Imports are not counted in GDP because they are not produced by RPUs of the economy but their values
    have been included in the expenditure of (C, I, G and X).

    Economics — Macroeconomics Page 2


    6. Gross national product / Gross national income (GNP) / (GNI)
    (a) Definition
    - GNP is the total income earned by residents of an economy from engaging in various economic activities during a
    specified period.

    (b) Conditions for being a resident


    - same as conditions for being a RPU

    (c) Calculating GNP from GDP


    - GNP includes factor incomes earned by residents from outside the economy.
    - These factor incomes are called ‘factor income from abroad’ or ‘inflow of factor income’.
    - GNP excluded factor incomes earned by non-residents from within the economy.
    - These factor incomes are called ‘factor income paid abroad ‘ or ‘outflow of factor income’.
    - GNP = GDP + Factor income from abroad – Factor income paid abroad
    - GNP = GDP + Net factor income from abroad

    Economics — Macroeconomics Page 3


    Chapter 2: Measurement of economic performance (I) — national income statistics and the general price level

    1. Nominal GDP and real GDP


    𝑃𝑟𝑖𝑐𝑒 𝑙𝑒𝑣𝑒𝑙 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
    - Real GDP = Nominal GDP × 𝑃𝑟𝑖𝑐𝑒 𝑙𝑒𝑣𝑒𝑙 𝑖𝑛 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
    - Nominal GDP is affected by changes in the pierce level.
    - Real GDP is a better measure of aggregate output as it can eliminate the effects of changes in the price level.
    - Real GDP can compare national power, living standard and economic growth in different economies.

    2. Per capita GDP


    𝐺𝐷𝑃
    - Per capita GDP = 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
    - Per capita real GDP can measure the general standard of living of people of an economy.
    - Per capita real GDP can compare national power, living standard and economic growth in different economies.

    3. Growth rate of national income statistics


    𝑆2 − 𝑆1
    - Growth rate = 𝑆1
    × 100%

    - Growth rate of real GDP can assess the economic performance of an economy.
    - Real GDP growth rates can compare national power, living standard and economic growth in different economies.

    4. Limitations of national income statistics


    - If the bad things did not count, GDP is overestimated.
    - If the good things did not count, GDP is underestimated.

    (a) Value of some unpaid services is not counted


    - The value of unpaid services produced by households for self-consumption will not be counted in GDP.
    - These productions can improve standard of living.
    - GDP may underestimate the standard of living.

    (b) Value of leisure is not counted


    - The more the leisure time, the higher the living standard.

    (c) Undesirable effects of production are not considered


    - Production may lead to pollution which has negative effects on humans.
    - GDP may overestimate the standard of living.

    (d) Distribution of income is not consider


    - If income distribution is highly uneven in an economy, most of its people may have a lower standard of living.
    - GDP may overestimate the standard of living.

    5. Price index
    - It is a figure that shows the price level of a basket of goods and services in a specified period relative to its price
    level in the base period.

    6. Consumer price index (CPI)


    - It shows the price level of consumer goods and services generally purchased by domestic households in a
    specified period relative to the price level in the base period.

    7. GDP deflator
    - It shows the price level of goods and services related to GDP (including C, I, X and M) in a specified period
    relative to the price level in the base period.
    Economics — Macroeconomics Page 4
    8. Relationship between the CPI and the GDP deflator
    (a) Similarity
    - Show the price level in the specified period relative to that in the base period.

    (b) Differences
    (i) Converge of goods and services
    - CPI better reflects households’ cost of living while GDP deflator reflects the general price level and the
    purchasing power of money.

    (ii) Weights
    - CPI assigns a fixed weight to each product, which reflects the consumption pattern in the base period while
    GDP deflator assigns a variable weight to each product, which reflects the output distribution in the current
    period.

    Economics — Macroeconomics Page 5

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