National Income and Economic Growth

Core aggregates

Gross Domestic Product (GDP) is the money value of all final goods and services produced within a country's borders in a given period, usually a year. Only final output is counted; intermediate goods are left out to avoid double counting.

GDP versus GNP. GDP follows location (what is produced inside the territory); GNP follows residency (what a country's residents earn, wherever they produce). Gross National Income (GNI) is the modern national-accounts name for the same idea as GNP. Net factor income from abroad is income received from abroad by residents minus income paid to non-residents.

Worked example. GDP at market prices is 5,000, net factor income from abroad is -200 and depreciation is 400. GNP = 5,000 - 200 = 4,800. NNP = 4,800 - 400 = 4,400.

Three methods of measurement

1. Production (value-added) method: add the value added at each stage, that is, sales minus the cost of intermediate inputs.
2. Income method: add the incomes generated by production, mainly compensation of employees and operating surplus (rent, interest, profit) and mixed income.
3. Expenditure method: GDP = C + I + G + (X - M), that is, consumption, investment, government purchases and net exports.

In principle all three give the same total.

Value-added example. A farmer sells wheat to a miller for Rs 100, the miller sells flour to a baker for Rs 150, and the baker sells bread to households for Rs 220. Value added is 100 + 50 + 70 = 220, equal to the value of the final good. Adding all sales (470) would be double counting.

Not counted in GDP: transfer payments such as social security allowances, sale of second-hand goods, purely financial transactions, and unpaid household work.

Nominal versus real

Nominal GDP is measured at current prices. Real GDP is measured at constant (base-year) prices and shows the change in physical output.

• GDP deflator = (Nominal GDP / Real GDP) x 100
• Real GDP = (Nominal GDP / GDP deflator) x 100

Example: nominal GDP of 660 with a deflator of 120 gives real GDP of 550.

If nominal GDP rises from 1,000 to 1,155 while the deflator rises from 100 to 105, real GDP rises from 1,000 to 1,100, so real growth is 10 percent although nominal growth is 15.5 percent.

Growth versus development

Economic growth is a sustained rise in real GDP or real per-capita income. It is quantitative. Economic development is broader: growth together with qualitative and structural change such as better health, education, lower poverty and inequality, and wider choices for people. Growth can happen without development, but lasting development needs growth.

Human Development Index (HDI)

The HDI is published by the United Nations Development Programme (UNDP) in its Human Development Report, first issued in 1990. It is a summary of three dimensions:

Each dimension is converted to an index and the three are combined by a geometric mean. The value lies between 0 and 1. The HDI does not itself capture inequality, poverty or human security.

Exam pointers

• Gross to net: subtract depreciation. Domestic to national: add net factor income from abroad. Market price to factor cost: subtract net indirect taxes.
• GDP counts only final goods; transfer payments and second-hand sales are excluded.
• Expenditure identity: C + I + G + (X - M).
• Real GDP removes the effect of price changes; growth rates are quoted in real terms.
• HDI: three dimensions, four indicators, geometric mean, published by UNDP.
• The income component of the HDI is GNI per capita, not GDP per capita.