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Unformatted text preview: Macroeconomics – Class One What is GDP? How do we calculate it? How does GDP differ from GNP? (i) Gross Domestic Product (GDP) measures the value of economic activity – ie. either total income or total output of an economy - within the geographical boundaries of a specific country in a given period of time, usually one year. To take the example of the UK, GDP includes the value of products made by overseas-owned UK factories who have invested in the UK. (ii) There are two primary methods to calculate GDP, the expenditure method and the income method. The expenditure method is the sum of the final expenditure on UK produced goods and services measured at current market prices, otherwise known as aggregate demand. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where C=Consumption, I=Capital Investment spending, G=Government spending , X=Exports of Goods and Services and M=Imports of Goods and Services. The income method measures the sum of factor incomes. It is calculated by income from people employment and in self-employment + profits of private sector companies + rent income from land. It should be noted that there are problems for both methods, and it is for this reason that an average measure for GDP is often published. (iii) Gross National Product (GNP) measures the value of output produced by a country’s citizens anywhere in the world, in a given period of time. Page 1 of 10 21 February 2008 E.g. cars produced by Citroen or Renault in the UK are included in UK GDP but the profits sent back to France add to France’s GNP. Sometimes the GNP is larger than a country’s GDP, sometimes not; the GNP of Pakistan is 25% higher than its GDP. Conversely, the GDP of Ireland is higher than its GNP. For the UK, our GNP exceeds our GDP because we have a net flow of investment income coming into the country from our overseas assets. For Ireland the reverse is true. In summary, GNP = GDP + net investment from abroad i.e. income received from other countries (e.g. interest and dividends), less similar payments made to other countries “The pursui t of economic growth — increases in GDP over time — is right ly the pri ma ry concern of macroeconomic policy. Though GDP does not measure well- being as such, it is a sufficient proxy to justi fy GDP growth as the overrid i ng policy prior i ty. ” Do you agree? The following quote, taken from the Independent in December 2002, sums up perfectly why GDP might not be the best measure of our economic wellbeing, and as such might not be the best objective for governments to pursue – “Improving living standards is about poor families gaining access to what is available at the time to make life comfortable, healthy and rewarding. In the end, economic statistics only measure what they measure, which may not bear much relation to how well off we are.” In other words, despite the advantages of modelling GDP (it is relatively straightforward, is a useful tool for comparison and there is a clear correlation between higher GDP and higher living...
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This note was uploaded on 04/29/2008 for the course PPE PPE taught by Professor None during the Summer '08 term at Oxford University.
- Summer '08