National Income Terminology & Calculations (HL IB Economics)
Revision Note
Nominal Gross National Income (GNI)
Nominal GDP measures the value of production within a country's borders
However, many countries host multi-national corporations whose profits are included in the GDP figures, even though they usually send their profits out of the country
Likewise, citizens of a home nation make profits in other countries (included in their GDP statistics) and return these profits home (Remittances can be a significant income source for many developing nations)
Gross national income (GNI) is therefore a more relevant metric in that it measures the nominal GDP + the net factor income earned from abroad
Worked Example
The table provides national income data for Vietnam in 2019 - presented in US$. Calculate the nominal GNI [3]
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Answer:
Step 1: Determine which of the data presented is relevant to the calculation
GDP = C + I + G + (X-M)
GNI = GDP + Net Income
So income tax is not relevant (it is a leakage)
Step 2: Substitute the relevant values into the GDP formula
GDP = C + I + G + (X-M)
GDP = 11255 + 8927 + 15697 + (8532 - 4957)
Nominal GDP = $39,454 million
Step 3: Substitute the relevant values into the GNI formula
GNI = GDP + Net Income
GNI = 39,454 + 4349
GNI = $43,803 million
(3 Marks for the correct answer or two marks for the correct GDP or 1 mark for any correct working in the process)
Real GDP & GNI
In economics, the use of the word nominal refers to the fact that the metric has not been adjusted for inflation
Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period
There has been no adjustment to the amount based on the increase in price levels (inflation)
Real GDP and GNI is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
Real GDP and GNI are often calculated using a price deflator known as the GDP deflator
The GDP deflator is used to convert nominal GDP/GNI from current prices to constant prices
Real GNI = Real GDP + Net income from abroad
Worked Example
Calculate the real GDP in 2020 and 2021 using the figures in the table below [4]
Year | Nominal GDP ($ Billion) | GDP deflator |
2020 | 114 | 102.7 |
2021 | 129 | 98.8 |
Answer:
Step 1: Substitute the values from 2020 into the equation
(Two marks for the correct answer or 1 mark for any correct working in the process. Answer needs to be rounded to 2 decimal places where appropriate)
Step 2: Substitute the values from 2021 into the equation
(Two marks for the correct answer or 1 mark for any correct working in the process. Answer needs to be rounded to 2 decimal places where appropriate)
Real GDP/Capita & GNI/Capita
Real GDP per capita = Real GDP / the population
It shows the mean wealth of each citizen in a country based on the value of GDP
This makes it easier to compare standards of living between countries
E.g. Switzerland has a much higher Real GDP/capita than Burundi
If a country has a real GDP value of $124 billion and its population is 42 million, we can calculate the real GDP/capita as follows
Real GNI per capita = Real GNI / the population
It shows the mean wealth of each citizen in a country based on the value of GNI
It provides a better comparison of the standards of living between countries than real GDP/capita
If a country has a real GNI value of $129 billion and its population is 42 million, we can calculate the real GNI/capita as follows
Real GDP/Capita & GNI/Capita at Purchasing Power Parity (PPP)
Purchasing power parity (PPP) is a conversion factor that can be applied to GDP and GNI
It calculates the relative purchasing power of different currencies
It shows the number of units of a country's currency that are required to buy a product in the local economy, as $1 would buy the same product in the USA
The aim of PPP is to help make a more accurate standard of living comparison between countries where goods/services cost different amounts
If a basket of goods costs $150 in Vietnam (once the currency has been converted) and the same basket of goods costs $450 in the USA, the purchasing power parity would be 1:3
It seems like the cost of living is much higher in the USA
However, if the USA's GNI/capita is more than three times higher than the GNI/capita of Vietnam, it could be argued the USA has better standards of living
Conversely, if the GNI/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services
Examiner Tip
When an exam question uses the phrase 'at constant prices' it is referring to real GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at constant prices'. This requires you to define real GDP and then explain the rise.
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