Macroeconomics

• Gross Domestic Product (GDP)


  Measures the total value of national output of goods & services produced in a given time period (usually a year or quarter of a year)
• Calculating GDP


  Output = Expenditure (Aggregate Demand) = National Income

  
• Value added


  The increase in market value of goods or services during each stage of production or supply
• Manufacturing


  • Producing tangible goods in factories
  • In 2019, manufacturing contributed 10 percent of UK GDP and 8 percent of all jobs
  • Manufacturing in the UK has been declining for several decades – this is known as de-industrialisation
• Services


  • Part of the tertiary sector
  • In 2019, the service sector accounted for 80% of UK output (GDP) and for 83% of jobs
  • Many manufacturing jobs depend on the demand for and output in service industries
• There are 2.4 million construction industry jobs in the UK in 2018, 6.8% of all jobs
• Output in construction fell sharply in May-June 2020 because of the coronavirus pandemic with some estimates finding a drop in production of more than 40 percent
• Economic growth


  The increase in the real value of goods and services produced and is measured by the annual percentage change in real Gross Domestic Product (GDP)
• The UK experienced a deep recession in 2020 because of the impact of the covid-19 pandemic
• UK GDP was 25% lower in April 2020 compared to February
• The IMF is forecasting that the size of the UK economy will contract by between 6-8% during the year 2020
• Nominal GDP


  The monetary value of the national output of goods and services measured at current prices
• Real GDP


  Takes inflation into account – where money GDP is adjusted for changes in the general price level

  
• The UK Treasury's July 2020 survey of independent forecasts for UK real GDP growth showed an average forecast of -9.1% for 2020 and 6.6% for 2021
• Turning nominal (money) GDP into real GDP

  Nominal GDP x 100/price index in year = Real GDP at constant prices

  
• Real GDP Per Capita

  Real income per head of population expressed at constant prices
• Real Disposable Income


  Income after deduction of taxes + benefits & adjusted for the effects of inflation
• Gross National Income (GNI)


  GDP plus net property income from overseas (NPIO)
• Remittance transfers are included in GNI and are important for some lower and middle-income countries
• In nominal terms measured at current prices, GDP in the UK was £2,216 billion in 2019
• GNI per capita is used when calculating the income component of the Human Development Index (HDI)
• Countries with strong net inflows of remittances and other incomes (ceteris paribus) will see their GNI rise
• Purchasing Power Parity (PPP)


  Measures how many units of one country's currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency
• In countries where the relative cost of living is high such as Norway and Switzerland, there will be a downward adjustment to a nation's PPP-adjusted GNI per capita
• In nations where the relative cost of living is low such as India, the real purchasing power of $1,000 will be higher and this leads to these countries seeing their PPP-adjusted per capita incomes rising in global league tables
• Big Mac Index


  Compares the US dollar price of Big Macs across countries in order to assess how under/overvalued the local currency is against the US dollar
• The Big Max index is regarded as an indicator for the purchasing power of an economy
• The Big Mac is used for comparison because it is a product available in almost every country and manufactured in a standardized size, composition and quality
• Prices can and do vary - for example because of differences in local taxes, rents, wages and the prices of locally-sourced ingredients
• Global prices for a Big Mac in July 2020, by country (in U.S. dollars)


  • Switzerland: 6.91
  • Lebanon: 5.95
  • United States: 5.71
  • Norway: 5.55
  • Britain: 4.28
  • United Arab Emirates: 4.02
  • Croatia: 3.32
  • China: 3.10
  • Hong Kong: 2.64
  • Mexico: 2.23
  • South Africa: 1.86
• Real GNI per capita expressed at purchasing power parity


  The main indicator for the standard of living
• There is an intense debate over whether GNI per capita is a sufficiently accurate and reliable measure of improvements in the standard of living and economic well-being for the bulk of a country's population
• Inclusive growth


  Living standards improve when a country sustains a rise in real per capita incomes (GNI) and when the benefits of growth are widely spread across the population
• Key benefits of using real GDP when assessing changes in living standards

  • Easy to make comparisons over time
  • Easy to compare different countries
  • It correlates with other measures of living standards including the Human Development Index (HDI)
  • Having a higher income generally correlates with being able to buy more goods and services
• Poorest countries in the world measured by GNI per capita ($) PPP (2018)


  • Central African Republic
  • Burundi
  • Liberia
  • Congo (Democratic Republic of the)
  • Niger
  • Malawi
• Selection of some of the richest countries in the world measured by GNI per capita ($) PPP (2018)

  • Luxembourg
  • Singapore
  • Ireland
  • United Arab Emirates
  • Norway
  • Switzerland
  • Hong Kong, China (SAR)
  • United States
• Published GDP data is subject to errors in measurement – the extent of errors vary by country & stage of development
• GDP tends to understate real national income per capita due to presence and growth of the shadow economy and the value of unpaid work done by volunteers and by people caring for their family
• The UK government estimated this hidden economy "tax gap" at £3.5 billion in 2016
• The coronavirus has helped national governments to target tax avoidance in the informal "shadow" economy