Measures of Economic

Activity
Chapter 8.2 - Tragakes

Learning outcomes:

Examine the output approach, the income approach and the expenditure approach when
measuring national income.

Distinguish between GDP and GNI as measures of economic activity.

Distinguish between the nominal value of GDP & GNI and the real value of GDP & GNI.

Distinguish between total GDP/GNI and per capita GDP/GNI

Evaluate the use of National Income stats, including their use for making comparisons over time,
between countries and their use for making conclusions about standards of living.

Explain the meaning & significance of 'green GDP'.

National Income & Aggregate Output

Important:
1. Examine the performance of an economy
over time.
2. Compare Income and Output.
3. Allows Governments to access information
that can help in making policy decisions.

Measuring Aggregate Output

Three Methods:
1. Expenditure Approach
2. Income Approach
3. Output Approach

Expenditure Approach
Measures the final spending on all goods & services in a given
time period usually 1 year.
Final: Those goods and services that are ready for use. Does
not include intermediate goods.
Four Components:
Consumption Spending + Investment Spending + Government Spending + Net Exports

Aggregate Output = GDP = C + I + G + (X-M)

Income Approach
All income earned by the Factors of Production
within a country over a period of time, usually 1
year.
Income Earned:
Labor, Rent, Interest earned from Capital, Profits from
Entrepreneurship
National Income to measure the level of Economic Activity
within an economy is not the same as GDP

Output Approach
Measures the value of each good & service
produced in an economy over a given period of time
usually 1 year.
Sums up all goods produced in a sector:
Agricultural, Banking, Manufacturing
Allows Economist to analyze performance sector by
sector.

Only includes final goods & services per sector.

GDP vs GNI/GNP
GDP:
Total value of all goods &
services produced within a
country regardless of who
owns them.

GNI/GNP:
Total Income received by
residents of a country,
equal to the value of all
final goods & services
produced by the countrys
residents regardless of
where they are located.

GDP within the borders of the country regardless of citizenship

GNI/GNP anywhere in the world and not confined by borders.

Nominal vs. Real

Nominal:

Real:

measurement of output in
terms of current prices.

measurement of output
change without changes
in price. Measures
output in relationship to a
baseline year.
Does not account for
inflation or price changes

Inflation + Output change = Nominal

If measuring or comparing Economies over a period of time it is important to use Real values.
Real values will let you know the change in output in an economy over a period of time not accounting
for price changes.

per capita
Measure the total output (expenditure, income, &
output) per person.
The total output divided by total population.
Importance:
1.
2.

Comparing countries with differing populations.

Changes in GDP per capita depends on population growth.

Drawback:
1.

Does not account for disparities of income.

Evaluating National Statistics

Do not.
1.

GDP & GNI do not include non-marketed goods (intermediate) which

contribute to the production of the final goods.

2.

Do not include goods & services sold in parallel markets (informal markets).

3.

Do not include quality improvements.

4.

Does not account for negative externalities or additional costs to society.

5.

Does not include the depletion of natural resources.

6.

Does not account for varying prices of a good across a country.

GDP/GNI & Standard of Living

GDP & GNI do not:
1. make distinction of output: weapons & guns
contribute differently to standard of living than education
& medical.
2. no distinction of societies education or health: both
contribute to standard of living.
3. No distinction regarding distribution of income.
4. no accounting for increased free time.
5. no accounting for quality of life factors: vacation,
family leave.

Green GDP
Since GDP & GNI do not account for the depletion
of resources, some countries calculate Green
GDP.
Takes into account the depletion of resources & is
calculated by:
Green GDP = GDP - value of environmental loss