Measuring national income

Key terms:

Gross Domestic Product (GDP) or national output - the total value of all final goods
and services produced in an economy in a given time period (usually one year).

Income method - measures the value of all income earned in a country from wages
(including benefits such as health insurance), self-employment, rent, shares and bank
interest, minus of course deductions to taxes.

Output method - calculates the total output produced in a country, counting only the
value added so that there is no double counting.

Expenditure method - calculates GDP by adding up the total money spent in the
economy. This includes private spending by households, investment spending by firms
and public sector spending by the government. The expenditure method also includes the
value of net exports, which is calculated by subtracted the value of imports (foreign goods
and services purchased by domestic citizens) from exports (goods and services purchased
by overseas residents).

Gross National Income (GNI) - made up of GDP plus net property income (current
transfers) from abroad. A GNP that is larger than GDP must have a positive figure
(balance) for net property income (current transfers).

Real GDP / GNI - GDP or GNI adjusted for the effects of inflation i.e. the rise in general
prices.

GDP / GNI per capita - GDP or GNI divided by the number of people in a nation. This
is a more accurate measure of living standards than the previous measurements because it
considers not only the size of a nation's income but the number of people that it is shared
between.

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InThinking www.thinkib.net/Economics 1
Activities

1. Watch the video your teacher will show you and then complete the activities included on
the page.

(a) What is GDP?

(b) Why are tyres used in car production not included in GDP but used tyres sold in a a
garage would?

(c) Would a car manufactured by Ford in Mexico count in the USA's GDP or Mexico's?

(d) What is the difference between nominal GDP and real GDP?

Activity 2: Avoiding double counting

When calculating national income via the output method, a beer company records the
following data:

A farmer grows malt and barley worth $5 to the brewer. The brewer then turns the malt and
barley into beer worth $40 which it sells to a bar or cafe. A bar then sells the beer for $80 in
individual units. Calculate the size of the additional GDP belonging to each industrial sector
and what is the total value added to GDP.

© Mark Johnson,
InThinking www.thinkib.net/Economics 2
Activity 3

Start by watching the following short video which illustrates the difference between GDP and
GNI as a measure of national income. Then answer the following short questions.

(a) How is GDP calculated?

(b) What are finished goods and services?

(c) What are capital goods?

(d) How is the value of national assets such as mountains, forest and wildlife included in a
nation's GDP?

(e) Outline the impact on the GDP / GNI of your country of the following:

i. Multinational businesses which have established subsidiaries in your country?

ii. When citizens of your nation work or set up businesses overseas and then send remittances
back to their family?

Activity 4: Gross national income (GNI)

In 2019 the UK's GDP was recorded as £ 2,828.643 billion. However, that figure included
goods and services produced by overseas companies who immediately repatriate those profits
back to their home country. Similarly, this figure does not include profits enjoyed by UK
residents on businesses located overseas. The difference between the two figures (net
property income) was calculated at - £ 41 b. What was the UK's GNI?

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InThinking www.thinkib.net/Economics 3
Activity 5

While the majority of countries have approximately the same value for GDP and GNP / GNI,
with the net transfers of money into and out of the country largely cancelling out, there are
notable exceptions. What might explain the disparity between GDP and GNI for the four
countries in the table below: All figures obtained from the IMF and relate to 2019.

Country GDP per capita GNI per capita GDP - GNI

Luxembourg $ 105,863 $ 70,260
Norway $ 75,389 $ 66,520
Singapore $ 57,713 $ 54,530
Ireland $ 68,710 $ 55,920

Activity 6

In January 12, 2010, on the West Indian

island of Hispaniola, comprising the
countries of Haiti and the Dominican
Republic, a large-scale earthquake occurred.
The most severely affected was Haiti,
occupying the western third of the island. An
exact death toll proved elusive in the
ensuing chaos. The Haitian government’s
official count was more than 300,000, but
other estimates were considerably smaller.
Hundreds of thousands of survivors were
displaced and many thousands of buildings
destroyed.

Outline the impact on Haiti's GDP and GNI of both the earthquake and rescue operation.

© Mark Johnson,
InThinking www.thinkib.net/Economics 4
Activity 7

Provide the correct terms to the definitions included.

Term Definition
The total output of a nation or the total income of a country
Gross domestic product, plus net property income from abroad
GDP or GNI adjusted for the effects of inflation
GDP or GNI divided by the number of people in a nation

Activity 8: HL activities

(a) Calculate the GDP of the following nation using the expenditure method

Billion £
Private consumption 1,220.311
Business investment 503.209
Government spending 174.072
Exports 300.000
Imports 428.000
Total GDP (expenditure method)

(b) Calculate GDP via the income method:

Billion £
Income from wages / government benefits 1,300.000
Income from rent 510.450
Interest earned 489.000
Dividends and profits earned 1,100.000
Net taxes paid 1,500.545
Total GDP (income method)

© Mark Johnson,
InThinking www.thinkib.net/Economics 5