Principles of Macroeconomics
ECON203,
Lecture 5: GDP and Related Measures of
Production and Income
Instructor: Turki Abalala
1
Recap of Last Lecture
• Measuring GDP using Expenditure and Income Approaches
Class Outline
 Gross National Product (GNP)
 Disposable Income
 Nominal GDP and Real GDP
 GDP Deflator
 Inflation Rate and Consumer Price Index
GDP and Related Measures of Production and
Income
 Gross national product or GNP is the market value of all the
final goods and services produced anywhere in the world in a
given time period by the factors of production supplied by
residents of the country.
• U.S. GNP = U.S. GDP + [Net factor income from abroad]
• [Net factor income from abroad] = Factor income received
from abroad – Factor income paid to other countries.
Example: Nikes’ income from the capital that it supplies to its
Saudi Arabia shoe factory is part of US GNP NOT part of US
GDP. But it is part of Saudi GDP.
GDP and Related Measures of Production and
Income

1.
2.
3.
When households receive their income, They
Pay some of it on taxes (T)
Save some (S)
Spend part of it on consumption goods and services (C)
4. But, some households receive benefits from government.
 Taxes – cash benefits from gov. = Net Taxes (NT)
 Therefore, total income= C +S + NT
 [C+S] is Called Disposable Income (DI)
 Total Income = DI + NT
GDP and Related Measures of Production and
Income
 Disposable Personal Income (DI)
Consumption expenditure (C) is one of the largest
components of aggregate expenditure. ID is the main
influence on C.
 DI is the income received by households minus personal
income taxes paid.
GDP and Related Measures of Production and
Income
 Because DI plays an important role in influencing spending,
the national accounts measure this item along with a number
of intermediate totals shown in the figure below.
GDP and Related Measures of Production and
Income
 Nominal GDP vs Real GDP
• Nominal GDP:
 It is the value of the final goods and services produced in
a given year expressed in the prices of that same year.
 A more precise name for GDP that is measured in the
current prices we pay for final goods and services.
 When a variable is measured in current prices, it is
described in nominal terms.
GDP and Related Measures of Production and
Income
• Real GDP:
 The total value of final goods and services produced in a
given year expressed in terms of the prices in a reference
base year.
 A base year is the year we choose against which to
compare all other years. (Prices of 2005 for US)
 Real GDP is also known as constant-prices GDP
and inflation-corrected GDP.
GDP and Related Measures of Production and
Income
 Why calculating Real GDP?
To measure the extent to which total production has increased
and remove from the nominal GDP numbers the influence of
price changes.
 Real GDP
Where quantity,
GDP and Related Measures of Production and
Income
To get the real GDP we multiply the quantity of each item
produced by its price in 2005 (the reference base year). An
example:
GDP and Related Measures of Production and
Income
 The percentage Change between GDP in 2013 and Real GDP in
2013 is called Growth Rate, which can be calculated as follow
GDP and Related Measures of Production and
Income
 Exercise :
Let say Saudi Arabia produced only Dates, given the following:
 Nominal GDP in 2010 was SAR100 million with SAR0.50 per
kg.
 Nominal GDP in 2012 was SAR 120 million with SAR0.55 per
kg.
 The reference base year is 2010.
a.
b.
c.
d.
e.
How much has nominal GDP increased in 2012?
Calculate the quantity Dates produced in 2012.
Calculate the real GDP in 2012.
Calculate actual/real growth.
Why not use two consecutive year’s nominal GDP to calculate
economic growth?
GDP Deflator
 GDP price deflator measures the general price level i.e. the
average price level of all final goods and services. It is an index
of the prices of all goods and services included in GDP.
It is calculated from the ratio of nominal GDP to real GDP.
Inflation Rate
 Inflation Rate is the percentage increase in the price level from one
year to the next.
Inflation rate can be calculated using:
1. Growth rate formula
Or
2. Consumer Price Index (CPI)
Consumer Price Index
 A CPI is a measure of the average of the prices paid by urban
consumers for a fixed market basket of consumption goods and
services included in GDP.
Exercise:
The CPI in Saudi Arabia was 172.1 (June 2010) and 178.3 (June
2012). Calculate Saudi’s annual inflation rate.
 What does the result mean?
 What is the difference between GDP deflator and CPI?
Reference
Chapter 5 of “Foundations of Macroeconomics”
Pages123-125
Now it’s over for today.
Any question?
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