Nominal GDP VS Real GDP
Nominal GDP (GDP at current market prices) is the GDP measures at market prices of the current period, i.e., GDP at current market prices = ΣPcQc, where Pc is the current market prices.
Real GDP (GDP at constant market prices) is the GDP measures at market prices of a specified base period chosen, i.e., GDP at constant market prices = ΣPbQc, where Pb is the current market prices.
It can be measured by revaluing the market price in base period or deflating the nominal GDP by a certain price indexes. Real GDP is a better measure of GDP since the effect of change in price level is eliminated so that change in real GDP implies change in aggregate output.
Per capita GDP/consumption = GDP/consumption divided by population, mainly used to show the living standard.
Full-employment GDP (Potential GDP) is a theoretical GDP when all resources are used efficiently. It eliminates the effect of misuse of resource and unemployment problem.
Demand side factor affecting actual GDP:
- C: increase in income/tax allowance or decrease in salaries rate increases consumption
- I: decrease in profit tax rate/interest rate increases investment
- Change in G, X, M affects GDP directly.
Supply factor affecting the potential GDP: quantity/quality increase in factors of production, technology, favourable economic policies, political stability, etc.
Uses of national income statistics
1) Assess economic performance of an economy
2) Reflect economic welfare (living standard) of a economy
3) Facilitate international comparison
4) Provide information for government to formulate economic policies, e.g. value-added of different industries shows that which sectors need more support.
5) Provide information for firm to make production and investment plans.
Limitations/weaknesses of national income statistics
1) Value of some unpaid services are excluded – underestimating economic welfare
2) Inaccurate estimation of illegal, unreported and non-marketed production
3) Value of leisure is excluded (more leisure time under the same GDP is preferred)
4) Undesirable effect of production is excluded (e.g. damaging the environment)
5) Change in general price level is ignored in nominal GDP
6) Population size is ignored in nominal GDP
7) Composition of output is ignored (e.g. only C, G relates to the economic welfare)
8) Income inequality not shown
9) Market value of a certain currency may not be unique
10) Time, e.g. durable serves for production more than the period of time but it’s not included.
General price level is the weighted average of price of all goods and services in the economy. The price index at base period is set at 100.
Consumer price index (CPI) is the price level of consumer goods and services generally purchased by domestic households in a specified period. In HK, CPI(A), (B) and (C) reflects the price level for lower, medium and higher income group, covering 50%, 30% and 10% of household respectively. Composite CPI reflects the price level of products generally purchased by all the above households.
Implicit price deflator of GDP shows the price level of goods and services related to GDP in a specified period.
GDP deflator of the current period = Nominal GDP / Real GDP * 100
CPI VS GDP deflator
- CPI covers consumer goods while GDP covers all goods and services related to GDP
- CPI has a more fixed weights (in HK, the weights are adjusted every 5 years) while GDP has variable weights, depends on the composition of GDP.
- CPI is a better indicator of living standard since the cost of living is related to those consumer goods and services.
Growth rate refers to (new-old)/old * 100%, while growth rate in GDP is approx. equal to growth rate in population * growth rate in per capita GDP.
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