Calculating Economic Growth

Calculating GDP using the Expenditure Approach

As we have previously learnt, the expenditure approach to measuring GDP is equal to:

Expenditure Approach GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X-M)

Expenditure Approach GDP = C+I+G+(X-M)

The table has some data for country A. Therefore, calculating the GDP using the expenditure approach would be:

GDP = C+I+G+(X-M)

GDP = 16.4+4.2+4.9+(1.7-2.4)

GDP of Country A = $24.8bn

Table 1: Country A's data

Calculating GNI

Again, as we have previously learnt, GNI takes into account the Income sent abroad from a country and the income received from Abroad. This could be from residents from one country living and working in another. Or it could be MNCs transferring income from one country to their home country. Therefore, to calculate GNI we:

GNI = GDP + Net Income from Abroad*

*where Net Income is calculated by taking Income Received from Abroad - Income Sent Abroad.

So using the data from table 1 above, we can calculate that countries GNI as:

Country A GNI = GDP + Income Received from Abroad - Income Sent Abroad

Country A GNI = 24.8 + (4.8 - 4)

Country A GNI = $25.6bn

Calculating real GDP/GNI using a price deflator

The problem with the figures we have previously calculated is that they represent a nominal value. As discussed earlier, this figure does not take into consideration changes in the price levels within an economy. Therefore, whilst the above calculations may be useful for looking at a particular moment in time, we are unable to use these figures to compare to other periods of time due to changes in price levels (inflation).

To calculate the price deflator:

Price Deflator = Nominal GDP/Real GDP x 100

In order to do this, we need to use real GDP figures. In order to calculate real GDP, we need to use a price deflator. By doing this we can measure the output valued at constant prices and this lets us see the actual changes in output. In order to do this, we construct a price index.

In the table above we are presented with the Nominal GDP values for each year and the Price Index. The price index as mentioned is used to adjust the value of all goods and services to a constant price. In this example, the base year is 2014 and we will use this to adjust each years nominal GDP to prices in 2014.

In order to calculate real GDP:

Real GDP = Nominal GDP/Price Deflator for that year x 100

Therefore, looking at the above, we can calculate the real GDP values.

In the above situation, we are now able to clearly compare the economic performance for this economy. In this case we can see that the Real GDP has increased year on year except for in 2017, when there was a decrease in Real GDP as compared to the previous year. This was despite an increase in the Nominal GDP from the previous year. From this, we can see that except for 2017 (when it experienced a decrease), this economy experienced an increase in its economic output.

The figures for 2017 also help us understand the importance of using Real GDP figures. We can see that between 2016 and 2017, Nominal GDP increased however real GDP decreased. The higher price index suggests the economy experienced inflation that year but lower economic output (something we will look at later called stagflation). Only by using real GDP figures can we actually see there has been a decrease in economic activity and, as we will see later on, the country would face the economic consequences that come with a decrease in economic activity.

Calculating real GDP/GNI per capita

Real GDP/GNI per capita measures the GDP of an economy divided by the total population.

Real GDP/GNI per Capita = Real GDP / Population

Let's take 2018 figures from the table above and imagine the total population of country A was 45 million people. To calculate Real GDP per capita:

Real GDP per capita = 90.25bn/45m

Real GDP per capita = $2005.56 per capita.

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