National Income Terminology & Calculations (SL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

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]


Category


Value in US$ millions

Consumption  11255
Investment  8927
Income tax 59577
Government spending  15697
Imports 4957
Exports 8532
Net Income 4349

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 space GDP space equals space fraction numerator Nominal space GDP over denominator GDP space Deflator end fraction space straight x space 100 
     
  • 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

Step 1:  Substitute the values from 2020 into the equation

   Real space GDP space equals space fraction numerator Nominal space GDP over denominator GDP space Deflator end fraction space straight x space 100

Real space GDP space equals space fraction numerator 114 over denominator 102.7 end fraction space straight x space 100

Real space GDP space 2020 space equals space $ 111 space Billion

(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

Real space GDP space equals space fraction numerator Nominal space GDP over denominator GDP space Deflator end fraction space straight x space 100

Real space GDP space equals space fraction numerator 129 over denominator 98.8 end fraction space straight x space 100

Real space GDP space 2021 space equals space $ 130.57 space Billion

 

(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 space GDP space Per space Capita space equals fraction numerator Real space GDP over denominator Population end fraction

Real space GDP space Per space Capita space equals fraction numerator $ 124 bn over denominator 42 million end fraction

Real space GDP space Per space Capita space equals $ 2 comma 952.38 space
 

  • 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 space GNI space Per space Capita space equals fraction numerator Real space GNI over denominator Population end fraction

Real space GNI space Per space Capita space equals fraction numerator $ 129 bn over denominator 42 million end fraction

Real space GNI space Per space Capita space equals $ 3 comma 071.43 space

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.

Did this page help you?

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.