3.1 Measuring economic activity and illustrating variations

• National income is a measure of the total economic activity that takes place within economy.
• Gross domestic product (GDP) is the total monetary value of all final goods and services produced within an economy in a given period of time.
• Gross national income (GNI) is the total income of a nation's people and businesses.
• Nominal GDP is the GDP calculated in a given year without consideration for inflation.
• GDP = C + I + G + (X - M)

  
  

  C - Consumption

  I - Investment spending

  G - Government spending

  X - Exports

  M - Imports
• GNI = GDP + incomes flowing in from other countries - incomes flowing out to other countries
• Real GDP and GNI can be calculated using a deflator, which reduces their nominal value using a price index for inflation.
• Real GDP = (Nominal GDP / Price deflator) x 100
• Real GNI = (Nominal GNI / Price deflator) x 100
• GDP per capita is the GDP divided by the population of a country, giving an average income per citizen.
• Real GNI per capita = Real GNI / Population
• Purchasing power parity (PPP) compares economic productivity and standards of living between countries on the basis of relative costs of goods and services.
• The business cycle shows economic output activity over time. It's broken down into four phases:

  1. an expandionary phase
  2. a peak phase (boom)
  3. a contractionary phase
  4. a trough (bust)

  
• GDP can rise above or fall below the potential, creating a positive or negative output gap.
• To make comparisons of living standards over time, real values of GDP and GNI need to be used. Nominal values are unsuitable. Even using real GDP and real GNI can overestimate or underestimate the population's economic well-being, as they do not reflect changes in living standards.
• The use of GDP and GNI in comparing economic well-being between countries is limited.
• Other measures of economic well-being include:

  • OECD Better Life Index
  • Happiness Index
  • Happy Planet Index