Revise National income statistics for Cambridge 9708 (4.1)

Gross Domestic Product (GDP) is the core measure of a country's economic activity. It represents the total monetary value of all final goods and services produced within a nation's geographical borders over a specific period, typically a year or a quarter. It can be calculated using three distinct but theoretically equivalent methods: the output, income, and expenditure approaches. The expenditure approach (C+I+G+(X-M)) is the most common, summing up total spending on final goods and services. GDP figures are vital for governments and economists to assess economic health, guide policy decisions such as fiscal or monetary interventions, and make international comparisons. A growing GDP generally signifies an expanding economy, while a shrinking GDP indicates a contraction or recession.

While GDP measures production within a country's borders, Gross National Income (GNI) measures the total income received by a country's residents, regardless of where that income was generated. The key difference is the inclusion of Net Property Income from Abroad (NPIA). This is the income earned by a country's residents on their overseas assets (e.g., dividends, interest) minus the income paid out to foreign residents on their assets within the country. For a country with significant overseas investments, GNI may be higher than GDP. Conversely, for a country with high levels of foreign direct investment, where profits are repatriated abroad, GNI may be lower than GDP. GNI is often considered a more accurate measure of a country's economic strength and the income available to its citizens.

When comparing national income over time, it is crucial to distinguish between nominal and real values. Nominal GDP (or GNI) is measured at current market prices, meaning it includes the effects of inflation. If prices rise, nominal GDP will increase even if the actual quantity of goods and services produced has not changed. To get a true picture of economic growth, economists calculate Real GDP. This is achieved by adjusting the nominal figure for inflation, using a price index called the GDP deflator. Real GDP is expressed in terms of 'constant prices' from a selected base year, allowing for a meaningful comparison of the volume of output between different years. A rise in real GDP indicates a genuine increase in production.

To compare living standards between countries or over time, total GDP or GNI is often divided by the population to give a per capita figure (e.g., GDP per capita). This provides a measure of the average income per person. While useful, it is a crude indicator with significant limitations. It is an average and therefore conceals income and wealth distribution; a high GDP per capita could coexist with extreme poverty for a large part of the population. Furthermore, it excludes the 'hidden' or informal economy, non-marketed output (like unpaid care and subsistence farming), and negative externalities such as pollution. Therefore, while GDP per capita is a starting point, it does not provide a complete picture of a nation's welfare or standard of living.

GDP measures production within a country's geographical borders, regardless of who owns the factors of production.

GNI measures income accruing to residents of a country, including net income from assets and labour abroad.

For a country with large overseas investment (e.g. many multinationals repatriating profits), GNI may differ significantly from GDP.

Expenditure approach: GDP = C + I + G + (X − M)

GNI = GDP + net property income from abroad

Real GDP = (Nominal GDP ÷ GDP deflator) × 100

GDP per capita = GDP ÷ population

If nominal GDP rises 8% but half is due to inflation, actual output has not grown by 8%. Real GDP holds prices constant so changes reflect volume of production.

The GDP deflator is a broad price index: (Nominal GDP ÷ Real GDP) × 100.