2020DSE

TOPIC 16: MEASUREMENT OF ECONOMIC PERFORMANCE (II)

16.1 NOMINAL (MONEY) GDP AND REAL GDP

A. GDP at current market prices / Nominal GDP / Money GDP

- It is the total output level of an economy measured at the market prices of the
current year.
- Illustration 1:
Assume that Country A produces shirt and rice only.

2005 2012
Output Price Output Price
Rice 100 $20 100 $25
Shirts 1,000 $100 2,000 $150

Nominal GDP in 2005 =

=

Nominal GDP in 2012 =

=

- _______________________ and ______________________ will affect its value.

B. GDP at constant market prices / Real GDP

- It is the total output level of an economy measured at the market prices of the
base year.
- Illustration 2:
Refer to the above example, calculate the following by using 2005 as the base
year.

Real GDP in 2005 =

=

Real GDP in 2012 =

=

- Only ______________________ will affect its value.

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C. Price Index – Implicit GDP deflator (Ref. Topic 17)

Implicit GDP
Deflator = Nominal GDP
________________ X 100
or Real GDP
Price Index

Question (1):
Refer to Illustrations 1 and 2, calculate the GDP deflator in 2005 and 2012
respectively.

Implicit GDP deflator in 2005 =

Implicit GDP deflator of the base year (i.e., 2005 in this e.g.) is ___________.

Implicit GDP deflator in 2012 =

Implicit GDP deflator > 100  price level _____

< 100  price level _____
= 100  price level _____

Question (2):
If the Price Index of the current year is 120, calculate the following expenditure at
constant market prices:

Expenditure components At current market At constant market

prices ($million) prices ($million)
Private consumption expenditure (C) 7 500
Government consumption expenditure (G) 1 000
Gross investment expenditure (I) 3 000
Net exports (X-M) 1 250
GDP

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D. Using Price Index to get Real GDP

Deriving from the equation on P.1, we have

Price Index at Base Period 

Real GDP = Nominal GDP x ___________________________
Price Index at Current Period

The process of finding the real GDP from nominal GDP is called GDP deflation.

Question (3):
GDP of Country A increased from $137,209 million in 2005 to $206,890 million in
2008. The price index of 2008 is 128.76. 2005 is the base year. Calculate the real
GDP for 2008 by using the above formula.

Real GDP _____ Nominal GDP, which implies that

 the price level has increased / decreased during the period 2005 – 2008.
 the purchasing power of money has increased / decreased during this
period.

Question (4):
GDP of Country B increased from $500 billion in 2008 to $1,000 billion in 2009.
The price index of 2008 is 120 and that of 2009 is 95. Calculate the real GDP for
2009.

Real GDP _____ Nominal GDP, which implies that

 the price level has increased / decreased and that there has been inflation /
deflation **.
 the purchasing power of money has increased / decreased during this
period.

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E. Growth Rates

Real GDP of current year – Real GDP of previous year 

Real GDP Growth Rate = ___________________________________________________ x 100%
Real GDP of previous year

Nominal GDP Growth Rate =

Growth rate of prices =

F. Relationship among nominal GDP, prices and real GDP

‧ ‧ ‧
YN = p + YR 
‧
where YN = nominal GDP growth rate
‧
YR = real GDP growth rate
‧
p = growth rate of prices

Question (5):
Fill in the blanks with correct figures.

‧ = ‧ + ‧
YN p YR
(1) ______ = 5% + 4%
(2) 3% = 5% + ______
(3) 3% = 3% + ______

Conclusion:
Hence, it is found out that:
If % in nominal GDP > % in prices  real GDP _________
If % in nominal GDP < % in prices  real GDP _________  -ve growth rate
If % in nominal GDP = % in prices  real GDP _________

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16.2 ACTUAL GDP VERSUS POTENTIAL GDP

- Potential GDP, Yf
 Potential GDP or full employment GDP is the value of final output produced
when ALL the country’s productive resources are fully utilized, holding
resources endowment and technology constant.
 In other words, potential GDP is the maximum / minimum value of output
that can be produced with all the existing production factors, resources and
technology.

- Actual GDP, Y
 Actual GDP refers to the value of output that is actually produced by the
resources utilized.
 By definition, actual GDP can / cannot exceed potential GDP, since potential
GDP is the maximum / minimum value of output which can be produced.
 However, actual GDP can / cannot be lower than potential GDP, and such
situation will result when some productive factors and resources are / are not
employed or utilized. In such case, ____________________ exists.

16.3 Factors Affecting the GDP (Refer to Topic 18 for further details.)

- The Demand-Side Factors: shifting the curve

AD = C + I + G + NX

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(1) Private Consumption Expenditure (C)

C = f( t, i, ……..)

t _____
i _____ C AD
where t = income taxes
i = interest rate

(2) Gross Investment Expenditure (I)

I = f( t, i, ……..)

t _____
i _____ I AD
where t = profits tax
i = interest rate

(3) Government Expenditure (G)

(4) Net Exports (Nx)

- The Supply-Side Factors: shifting the & curves

An increase in the supply-side factors raises a country’s maximum productive

capacity.
(1) Natural resources 
(2) Man-made resources 
(3) Human resources 
(4) Technology 

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16.4 Uses of National Income Statistics

National income statistics can be used to:

(1) assess the economic performance of an economy;
(2) reflect the economic welfare of an economy;
(3) facilitate international comparison;
(4) provide information for the government in formulating economic policies;
(5) help firms make production and investment plans.

16.5 Limitations of National Income Statistics 

(1) Changes in the general price level should be considered.
 A rise in nominal GDP may not imply an improvement in economic
welfare because it may be caused by an increase in the general price
level rather than an increase in the volume of production.
 A better measure is the ____________________.

(2) Population size should be considered.

 A large GDP may not imply a high standard of living if it is to be
shared among a huge population.
 A better measure is the ____________________.

(3) Distribution of wealth/income is not considered.

 If income is _______________ distributed, a large GDP (even per capita
real GDP) does not imply a high standard of living for the average
people.

(4) Production of unpaid household services and non-marketed outputs are

excluded.
 Domestic and personal services are not included in the national
income accounting, so GDP overestimates / underestimates the
standard of living.

(5) Composition of output should be considered.
 The standard of living in a country depends largely on the availability
of ____________________________. If a large part of the GDP consists
of capital goods / national defence, the current standard of living will
not be high.

(6) Undesirable effects of production are not considered.

 GDP statistics fail to consider the undesirable effects of production
such as pollution (i.e., _____________ cost) so overestimate /
underestimate our true standard of living.

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(7) The value of leisure is not counted.

 GDP does not reflect the length of working hours. It may overestimate
/ underestimate the standard of living because residents may have
worked for longer working hours but less leisure time.

(8) There are many difficulties encountered in calculating GDP.

GDP figures may not be reliable due to the following problems:
 __________________ information: Some people tend to
________________ their income; some people’s income are irregular
and _________________.
 possibility of _________________________
 difficult to estimate the value of illegal production (e.g. smuggling and
piracy), unreported production (e.g. private tutoring, retailing of
hawkers), and non-marketed production (e.g. production of
agricultural products for self-consumption).
 difficult to get information about foreign receipt and payment
 different national income accounting methods are used by different
countries

(9) Market value of domestic currency should be considered.

 GDP of different countries must be expressed in terms of the same
currency (usually US$) so that they can be _________________.
However, some countries may adopt a _____________ exchange rate so
that the market exchange rate is ___________________ or
_________________, i.e., not the free market exchange rate. As a result,
bias is unavoidable.
 _________________________________ exchange rates (PPP exchange
rates) can be used as a remedy.

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CONCEPT MAP

Value-added / Output / Production Approach (GDPfc)

Value added = value of output – value of inputs purchased from other firms

Expenditure Approach (GDPmp)

GDP
GDPmp = C + I + G + (X – M)
Calculation

Income Approach (GNPmp)

GNPmp = w + i + R + π + depreciation + (IBT – S)
= NI + depreciation + (IBT – S)

GDPfc + IBT - S GDPmp

GDP at current Price Index of base year GDP at constant market

market prices x Price index of current year prices (Real GDP)
(nominal GDP)

Per capita GDP = GDP of an economy

Population size

Real GDP growth rate = Real GDP of current year – Real GDP of previous year x 100%
Real GDP of previous year

NNP = GNP - depreciation

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