National Income Terminology & Calculations (HL IB Economics)

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
  

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
   

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• Real GNI = Real GDP + Net income from abroad

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