Supplement to

Chapter 5 GDP
Prepared by: Elaine Joy G. Claudel, CPA, MMBM
Types of GDP

•Nominal GDP
•Real GDP
 Nominal GDP
• It is an assessment of economic production in an economy that includes
current prices in its calculation.
• Nominal GDP = Current price x Quantity of goods and services produced
Effects of inflation on Nominal GDP:
• Nominal GDP Increase:
• Direct Effect: Inflation increases the prices of goods and services, leading to a rise in
their nominal values. Even if the quantity of production remains constant, higher
prices contribute to an overall increase in nominal GDP.
• Overstating Real Economic Growth:
• Indirect effect: Nominal GDP includes both real economic growth and the impact of
inflation. When assessing economic expansion, using nominal GDP alone may
overstate the actual growth due to inflation. Analysts often prefer real GDP, which
adjusts for inflation, for a more accurate measure of economic growth.
• Distorted Investment and Spending Decisions:
• Uncertain Pricing: Inflation introduces pricing uncertainty, influencing decisions on
investments, spending, and saving for businesses and consumers. It can also affect
the accuracy of financial statements and budgeting.
Limitations of Nominal GDP
• Doesn't Account for Inflation
• Misleading Growth Comparisons
• Unreliable for International Comparisons
• Ignores Income Distribution
• Volatility from Price Swings
• Excludes Non-Market Transactions
• Focuses on Output, Not Welfare
Some factors that are not included in nominal
GDP
[Link] Costs in Production: Nominal GDP excludes external costs
important to production, such as waste and environmental factors. It
measures certain costs but doesn't fully account for the environmental
impact associated with economic activities.
[Link] Process Steps: Nominal GDP considers only the final
production of goods and services, overlooking the intermediate steps and
parts used during the manufacturing process. It focuses on the end result
rather than the entire production chain.
[Link] Services: Nominal GDP does not include unquantifiable but
valuable services like unpaid internships and volunteer work. Certain
contributions to society and the economy are not measured because they
lack a monetary value.
Real GDP
• Real Gross Domestic Product (GDP) is a macroeconomic
measure that calculates the total value of all final goods and
services produced in an economy, adjusted for changes in
prices or inflation. Real GDP provides a more accurate
representation of an economy's actual output by removing
the effects of price changes over time.
• Real GDP = Nominal GDP/Price Index
 Key points about Real GDP:
[Link] for Inflation (Purpose): Real GDP adjusts for overall price level changes, ensuring a
more accurate assessment of economic output.
[Link] Prices (Calculation): Real GDP uses constant prices from a base year, eliminating the
impact of price fluctuations on economic growth measurement.
[Link] Over Time (Usefulness): Real GDP is valuable for comparing economic performance
across different periods, providing a consistent measure unaffected by inflation.
[Link] Accurate Economic Growth (Insight): Analysts rely on real GDP to distinguish changes in
output from changes in prices, offering a clearer view of underlying economic trends.
[Link] Deflator (Calculation Aid): The GDP deflator, a ratio of nominal to real GDP, gauges inflation's
extent, aiding in understanding the price component of economic growth.
[Link] Evaluation (Policy Impact): Policymakers use real GDP to assess economic policy impacts
and make informed decisions for adjustments or interventions.
[Link] Analysis (Insight into Sectors): Real GDP breakdown by sectors (e.g., agriculture,
manufacturing, services) offers insights into specific segments of the economy.
[Link] (Exclusions): Real GDP, while addressing inflation, has limitations, like not fully
capturing quality of life, income distribution, and certain non-market activities.
GDP Per Capita
• It is a measure of the economic output or income of a country per
person.
• The formula for GDP per capita is:
GDP per Capita=Gross Domestic Product (GDP)
Population

• Can be expressed in nominal terms, real terms, or purchasing

power parity terms
• Used to gauge a country’s overall wealth and productivity.
Why is GDP per capita important?
• GDP per capita is crucial as it measures the average economic well-
being of a population, aiding in assessing living standards, guiding
policy decisions, and enabling international comparisons.
GDP per capita is important for several reasons:
1. Standard of Living: It provides a measure of the average standard of living in a region, indicating the level of
economic well-being experienced by the population.
2. Economic Development: GDP per capita is often used as an indicator of a country's economic development.
Higher values generally correlate with more advanced and prosperous economies.
3. International Comparisons: It facilitates comparisons of living standards and economic performance between
countries, helping identify disparities and areas for improvement.
4. Policy Decision-Making: Policymakers use GDP per capita to assess the impact of economic policies and make
informed decisions to promote growth, development, and income distribution.
5. Poverty Assessment: Low GDP per capita can be an indication of poverty and inadequate living standards. It is
a key factor in assessing and addressing poverty levels.
6. Investment and Business Decisions: Investors and businesses use GDP per capita to evaluate market potential,
consumer purchasing power, and overall economic conditions when making investment decisions.
7. Resource Allocation: Governments use GDP per capita to allocate resources, plan public services, and address
socio-economic challenges in different regions.
8. Economic Disparities: It highlights disparities in income distribution within a country. Even if the overall GDP
per capita is high, disparities may indicate issues with wealth distribution.
9. Monitoring Progress: Over time, changes in GDP per capita serve as an indicator of economic progress or
decline, helping to monitor the effectiveness of economic policies and development initiatives.
[Link] of Life: While not capturing all aspects of well-being, GDP per capita is correlated with certain
indicators of quality of life, such as access to education, healthcare, and infrastructure.
What factors contribute to GDP per Capita Growth?
[Link] Increase 9. Natural Resource Management:
[Link] in Human Capital 10. Population Growth Control:
[Link] Development: 11. Financial Development:
[Link] and Technology: 12. Health and Healthcare:
[Link] Stability and Governance: 13. Inclusive Economic Policies:
[Link] to Trade: 14. Research and Development:
[Link] Stability: 15. Global Economic Conditions:
[Link] and Business
Environment:
What factors contribute to GDP per Capita
Growth?... continuation
• A growing population can also contribute to GDP
growth, but if the population grows faster than GDP,
it can lead to a decrease in GDP per capita.
How is GDP per capita used in economic analysis?
[Link] of Living Assessment - serves as a key indicator of the average standard
of living
[Link] Development Comparison - used to compare the level of economic
development among countries, providing insights into disparities and identifying
areas for improvement.
[Link] Analysis Over Time: Analysts examine changes in GDP per capita over time
to identify trends, understand economic growth or decline, and assess the
effectiveness of economic policies.
[Link] Evaluation: Policymakers use GDP per capita to evaluate the impact of
economic policies, helping them make informed decisions regarding fiscal,
monetary, and social policies.
[Link] Decision-Making: Investors and businesses use GDP per capita to
assess market potential, consumer purchasing power, and overall economic
conditions when making investment decisions.
[Link] Assessment: Low GDP per capita can be indicative of poverty, and analysts
use this metric to assess and address poverty levels within a country.
[Link] Allocation: Governments use GDP per capita to allocate resources, plan
public services, and address socio-economic challenges in different regions.
How is GDP per capita used in economic analysis?
8. Quality of Life Indicator: While not capturing all aspects, GDP per capita is
correlated with certain indicators of quality of life, such as access to education,
healthcare, and infrastructure.
9. International Benchmarking: It facilitates international comparisons, allowing
analysts to benchmark economic performance and living standards among different
countries.
10. Sectoral Analysis: GDP per capita can be broken down by economic sectors,
providing insights into the performance of specific segments of the economy, such as
agriculture, manufacturing, and services.
11. Inflation Adjustment: Analysts use GDP per capita to assess economic growth
after adjusting for inflation
12. Labor Market Assessment: GDP per capita can be used to analyze labor market
conditions, including employment levels, wages, and overall workforce productivity.
13. Global Economic Trends – it helps analysts understand the economic positioning
of a country in the international landscape.
GDP Growth Rate
• What is GDP Growth Rate?
• GDP growth rate is the percentage increase in the Gross Domestic
Product (GDP) of a country over a specific period, usually measured
annually or quarterly. It indicates the rate at which the total value of
goods and services produced in an economy is expanding or
contracting. The formula for GDP growth rate is:
• GDP Growth Rate=(GDPNew−GDPOld/GDPOld)×100

•
Why is GDP Growth rate important?
• The GDP growth rate is important as it indicates the
overall health and direction of an economy, influences
investor and business decisions, guides policymaking,
and serves as a key factor in assessing employment
trends and economic stability.
The GDP growth rate is important for several
reasons:
[Link] Health Indicator
[Link] or Contraction Signal
[Link] Trends
[Link] and Business Decision-Making
[Link] Evaluation
[Link] Stability
[Link] Adjustments
[Link] Planning and Government Finances
[Link] Competitiveness
[Link] of Living Improvement
[Link] and Creditworthiness Assessment
[Link] Forecasting
Interpreting GDP growth rate
• Positive Growth – sign of a healthy economy
• GDP growth rate is too high – can lead to inflation
• Negative Growth – can indicate a sluggish economy
• In some cases – reflects temporary downturn that does not signify a long-
term trend
Gross domestic product (GDP) vs. Gross
National Product (GNP)
GDP - Definition GNP - Definition
• Represents the total value of all • Measures the total value of all
final goods and services final goods and services
produced within the borders of produced by a country's
a country during a specific time residents (including those living
period. abroad) during a specific time
period.
Gross domestic product (GDP) vs. Gross
National Product (GNP)
GDP – Focus GNP - Focus
• Focuses on the economic activity • Takes into account the earnings of
that occurs within a country's a country's citizens and businesses,
geographical boundaries. both within the country and
Calculation: abroad.
• Calculated by adding up Calculation:
consumption, investment, • Calculated by adding GDP and the
government spending, and net income earned by the country's
exports (exports minus imports). residents from abroad, while
subtracting the income earned by
foreign residents within the
country.
Gross domestic product (GDP) vs. Gross
National Product (GNP)
GDP – International Transactions: GNP - International Transactions:
• Does not account for the income • Includes the income earned by a
earned by a country's residents country's residents both
outside its borders. domestically and abroad.
Use: Calculation:
• More commonly used and • Less commonly used in comparison
reported. It is often used to assess to GDP, but it provides insights into
the economic health and the total economic involvement of
performance of a country. a country's residents on a global
scale.
In the Philippines, does GDP include
remittances of OFWs? Explain.