Don Bosco MMS

By Anuj S Sharma India | Yr 2011

Basic terminologies
Gross Domestic Product [GDP] GDP is the value of all domestically produced final goods and services Gross National Product [GNP] GNP is the value of all final goods and services produced by domestically owned factors of production Final goods v/s Intermediate goods Final good: A good used for final consumption. E.g Biscuits we consume of a particular company Intermediate goods are inputs in the production process. E.g wheat used for making biscuits Another explanation: GDP is "the total market value of goods and services produced within the borders of a country, regardless of the nationality of those who produce them. GNP is the total market value of goods and services produced by the residents of a country, even if theyre living abroad. So if a U.S. resident earns money from an investment overseas, that value would be included in GNP (but not GDP). And the value of goods produced by foreign-owned businesses on U.S. land would be part of GDP (but not the other measure)
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GDP Measuring
GDP measurement Primarily three equivalent methods of estimating GDP Expenditure approach

Total expenditure on all final goods and services produced

Income approach

Total income received by all factors of production

Output approach

Sum of value added at each stage of production Components of GDP: Economists often split aggregate expenditure into four components : 1. Consumption [C] 2. Investment [I] 3. Government Spending [G] 4. Next Export [NX] Hence GDP = C + I + G + NX For more details can refer SNA93 or System of National Accountsbook for international standards for measuring GDP
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Difference between GDP and GNP

GDP is the value of all output produced @ home 4GNP is the value of all output produced using domestically-owned factors of production

Some output produced @ home is produced by foreigners (this should not count in GNP)
Some output produced abroad is produced by domestically-owned factors (this should count in GNP) Hence GNP = GDP + net factor income from abroad

Standard of living and GDP

GDP per capita is not a measurement of the standard of living in an economy. However, it is often used as such an indicator, on the rationale that all citizens would benefit from their country's increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while real incomes for the majority decline. The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries. The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure of total national economic activity a separate concept. The argument for using GDP as a standard-of-living proxy is not that it is a good indicator of the absolute level of standard of living, but that living standards tend to move with per-capita GDP, so thatchanges in living standards are readily detected through changes in GDP. [Reference wikipedia]
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GDP
Stands for: Formula for Calculation:

GNP

Layman Usage:

Gross Domestic Product Gross National Product GDP = consumption + investment + GNP = GDP + NR (Net (government spending) + (exports income from assets abroad (Net imports) IncomeReceipts)) Total value of Goods and Total value of products & Services Servicesproduced by all produced within the territorial nationals of a country (whether boundary of a country within or outside the country) Business, Economic Forecasting Business, Economic Forecasting Luxembourg ($87,400) Liberia ($16) USA ($14.12 Trillion in 2009) India: $1.38 Trillion as in 2009 To see the strength of a countrys local economy An estimated value of the total worth of a countrys production and services, calculated over the course on one year Luxembourg ($45,360) Mozambique ($80) USA (~ $14.01 Trillion in 2009) India: $3.79 Trillion in 2009 To see how the nationals of a country are doing economically GDP (+) total capital gains fromoverseas investment (-) income earned by foreign nationals domestically
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Uses:

Country with Highest Per Capita (US$): Country with Lowest Per Capita (US$): Country with Highest (Cumulative): Application (Context in which these terms are used):
Definition:

Trade deficit and current account

What is a trade deficit? A country runs a trade deficit when it imports more than it exports, i.e. NX<0 Is the trade deficit synonymous with a current account deficit? No The current account deficit measures a countrys total (current-period) deficit to the world? Whats missing in the trade deficit when compared to Current account? Interest payments on your accumulated debt Alternatively if you are net creditor you receive interest on your accumulated assets The current account balance essentially measures your total (current-period) deficit/surplus to the world Current account = trade deficit + net factor income from abroad: CA = NX+ iNFA Illustration: A country may run a trade surplus but still have a current account deficit Balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance
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Cumulative current account Balance 1980-2008 based on IMF data

Standard of living and GDP

GDP per capita is not a measurement of the standard of living in an economy. However, it is often used as such an indicator, on the rationale that all citizens would benefit from their country's increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while real incomes for the majority decline. The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries. The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure of total national economic activity a separate concept. The argument for using GDP as a standard-of-living proxy is not that it is a good indicator of the absolute level of standard of living, but that living standards tend to move with per-capita GDP, so thatchanges in living standards are readily detected through changes in GDP. [Reference wikipedia]
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Current account
CA = GNP (C + I + G) GNP is simply a countrys income (C + I + G) (called domestic absorption) is simply what a country spends So countries run CA deficits when they spend more than they produce

Role of Tarrifs The current account is the trade deficit plus net factor income from abroad oFor the US net factor income is relatively small What causes trade imbalances oHigh tariff barriers abroad oUnfair practices and a level playing field

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