ECONOMICS

HSS 301

Part B (Macroeconomics)
Discussion - 3
Measuring the Value of
Economic Activity/
Standard of Living/
Nation’s Income
Gross
Domestic • The market value of all final
goods and services produced
Product within a country in a given
(GDP) period of time.
Carefully Understand

• Market Value
• Final Goods & Services
• Within a Country’s Border
• In a Given Period of Time
 Value of intermediate Goods
Value of Used Goods
Exclusions
Transfer Payments
from GDP
Calculation Financial Transactions
Non-Market Transactions
Unreported Transactions
Illegal Transactions
Intermediate Goods
• Goods used to make final products. (Salt, Color, Steel, Wood, Glass)

Used Goods
• Second-hand products. Resale of cars, electronics, furniture

Transfer Payments
• Disaster relief, old age benefit, unemployment benefit

Financial Transactions
• Buying bonds, stocks, giving loans, repayments
Non-Market Transactions
• Activities that serve oneself or one’s family. Cooking, cleaning,
doing laundry, homeschooling children, helping family members

Unreported Transactions
• Gifts, tips, yard sales, barter among neighbors or friends

Illegal Transactions
• Trade in stolen goods, drug dealing, smuggling, gambling, fraud
Per Capita Per Capita Income =
𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐺𝐷𝑃
GDP 𝑇𝑜𝑡𝑎𝑙 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
 GDP = 416.3 billion USD
Bangladesh Per Capita GDP = 2,503.04 USD

Source: World Bank Open Data (2021)

 Value Added Approach
The Three
Approaches of Income Approach
Measuring GDP
Expenditure Approach
 Value Added Approach

• It is very difficult to distinguish between final product

and intermediate product.
• In order to avoid this multiple counting, we only
consider the value added at each stage of production.
• Value added is the market value of the product sold by a
firm, less the value of the products purchased and used
by the firm (as inputs) to produce the final product.
Example

Stage of Product/Intermediate Selling Price of Value Addition

Production Product the Product (Tk) (Tk)
Farmer Wheat 20 20-0=20
Flour Producer Flour 30 30-20=10
Baker Bread 50 50-30=20
Grocery Store Packet of Bread 60 60-50=10
Total Value Addition 60
Example (Do yourself)
Stage of Product/Intermed Selling Price of Value Addition
Production iate Product the Product (Tk) (Tk)
Farmer Cotton
Fiber
Yarn
Fabric
Apparel
RMG Company RMG
Total Value Addition
 Gross Value Added (GVA)
Stage of Industry-1 Industry-2 Industry-3 …….
Production
Stage-1
Stage-2
Stage-3
......
Total Value
Addition

Gross Value Added = Summation of total value addition

from all industry sectors
GDP from Value Added Approach

GDP =
Gross Value Added +
Value of Capital Goods +
Value of Inventory Investment
 Bangladesh National Accounts Statistics

• In this approach, the economy is divided into 15 industry

sectors following the International Standard Industrial
Classification (ISIC).
• In this method, the Gross Value Added (GVA) of each of
the sectors are summed together to arrive at the value of
GDP. Sector-wise deflator is used for estimating sectoral
GVA at constant price.
• The GDP figure BBS (Bangladesh Bureau of Statistics)
publishes is derived using production method/Value
added Approach.
 • This approach involves adding
up all the incomes received by
households and firms in the
economy, including profits
Income and tax revenue to the
government.
Approach • The income approach defines
GDP in terms of the income
created from producing all
final goods and services.
 GDP from Income Approach
• Net Domestic Income (at market prices) =
• Wages, Salaries, and Supplementary labor Income +
• Profits of Corporations and Govt. Enterprises before taxes +
• Interest and Investment Income +
• Net Income from Farms and Unincorporated Businesses +
• Taxes less subsidies on factors of production

• Gross Domestic Product =

• Net Domestic Income +
• Depreciation +
• Statistical Discrepancy
Bangladesh National Accounts Statistics

• Due to a lack of required information on the

income of the various factors of production, the
BBS cannot compile GDP using the Income
approach and instead relies on the Production and
Expenditure methods.
 • GDP is the total spending on
currently produced final goods
and services in the economy. The
expenditure approach allows us
to get information on the
Expenditure different components of spending
Approach that add up to GDP.

• Let’s learn from the story of

Robinson Crusoe & his simple
economy
Robinson
Crusoe

Adventurer who became

shipwrecked & castaway
in a remote tropical island
for 28 years
Consumption Goods
Capital
Goods or
Investment
Goods
Public Goods
Export & Import
Goods
• Crusoe rescues Friday
• Friday was good at
climbing trees &
getting coconut
• They started trading
Fish & Coconut
 National Income Identity:
𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
Expenditure Y= GDP/Total Production/Output
Approach C= Consumption Expenditure
I= Investment Expenditure
G= Government Expenditure
NX= Net Exports (Exports-Imports)
Components of GDP
Consumption Total spending on currently
produced consumer goods &
Expenditure (C) services by households.
 Categories

Expenditure on Durable Goods (last a long time)

• Electronics, automobiles, furniture, home appliances

Expenditure on Non-Durable Goods (short lived)

• Food, clothing, fuel, housing service (rented apartments)

Expenditure on Services
• Education, medical care, air travel, financial services,
haircut, laundry
 • Spending on currently produced
capital goods that are used to
produce goods & services over a
Gross period of time.
Investment
• Transfer of existing capital goods
Expenditure (I) doesn’t create new capital. Thus,
buying stocks or bonds are not
included here.
 Categories

Business Fixed Investment/Non-Residential Investment

• All final purchases of machinery, equipment, plants & tools by
businesses

Residential Investment
• Expenditure by households & firms on new houses, apartment
buildings, warehouses, stores.

Change in Business Inventories

• Unsold finished goods (ready for sale), goods in process of
production (unfinished), unused but stocked raw materials
• Purchased houses & apartments are capital goods because
they produce a service (a roof over our head) for an
extended period of time.
• Housing services (rented apartments) are non-durable
consumption because these services are short lived (typically
monthly) & need to be renewed.

• Firm hold inventories because they can’t predict exactly how

much will be sold each day/month.
• Inventories are capital because they produce value in future.
• Fall in inventory is negative investment.
Depreciation

• Capital goods like machinery wear out over time due

to usage & needs to be replaced.
• Depreciation is decline in the value of capital goods
due to usage & from capital being replaced because it
becomes obsolete.
• In other words, Depreciation is the amount of capital
that is used up in the process of producing GDP.
 Net Investment & Capital Stock

• Net investment is the actual addition to the stock of existing capital

Net Investment = Gross Investment – Depreciation
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑒𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑁𝑒𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

• NI>0 (positive net investment) when, Depreciation<GI & capital

stock has increased
• NI<0 when, Depreciation>GI & Capital stock has declined
Financial vs. Physical Investment

• When economists talk about investment, they refer

to change in physical capital stock which are tangible
(factory, machinery, vehicles, computers etc.)
• Generally, when we say we need some capital to start
a business, we mean financial capital which are
indirect & less tangible investment (stocks, bonds
• Investment in physical capital increases capital stock
for businesses while financial investment allows
businesses to raise money for their operations.
 • Spending by the government on
currently produced consumer
goods & capital goods
Government
Expenditure (G) • Every government need to directly
participate in the economy to
enhance productivity & improve
the standard of living
 Categories

Government consumption expenditure

• All spending on final goods, all direct purchases of resources
including labor. (salaries, military logistics)
(excluding Transfer Payments)

Government investment expenditure

• Government projects & programs aimed at the development of
the country. Includes infrastructure, healthcare, education,
energy, transportation & other public services.
 Net Exports (NX) or Trade Balance

Net Exports (NX) = Exports (X) – Imports (M)

• IF, NX>0, the country has Trade Surplus
• IF, NX<0, the country has Trade Deficit

• Exports: $52.08 billion; Imports: $82.49 billion. (2021-2022)

• In Bangladesh, imports exceed exports making NX<0. This is because
the exports of Bangladesh heavily rely on the imports of capital
goods & other raw materials. Most of the imports are productive. In
2014-15, only 11% of total imports were for consumption purposes.
 Other National Accounts

GNP (Gross National Product) =

=GDP + Net Income from Non-Residents
=GDP + Factor payments from abroad – Factor payments to abroad
NDP (Net Domestic Product) = GDP – Depreciation
NNP (Net National Product) = GNP – Depreciation
Private Disposable Income = Personal Income – Income Tax

In 2021, GNP of Bangladesh was 435.53 billion USD

Nominal GDP vs. Real GDP
 Nominal GDP

• GDP at current market prices. (The production of goods and

services valued at current year market prices)

• Nominal GDP in 2022 =

Quantity of Product_1 in 2022 * Price of Product_1 in 2022+
Quantity of Product_2 in 2022 * Price of Product_2 in 2022 +
………
• An increase in nominal GDP could be due to rising quantity of
goods and services or due to their rising prices, or both.
Disadvantage

• Nominal GDP do not tell us what is happening to

economic activity over time if prices are changing.
• If, for example, all prices of goods and services in the
economy doubled, then nominal GDP would double
as well, but the actual quantity of goods produced,
and hence economic activity, would be unchanged.
 Real GDP

• GDP at base year prices. (The production of goods and services

valued at a selected base year market prices)

• Real GDP of 2022 (taking 2015 as base year) =

Quantity of Product_1 in 2022 * Price of Product_1 in 2015+
Quantity of Product_2 in 2022 * Price of Product_2 in 2015 +
………
• Since prices are constant in this case, Real GDP rises only when
economic activity/production increases.
 GDP Deflator

It is the ratio of Nominal GDP to Real GDP

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑃𝑐𝑢𝑟𝑟𝑒𝑛𝑡 × 𝑄 𝑃𝑐𝑢𝑟𝑟𝑒𝑛𝑡

𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = = =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑃𝑏𝑎𝑠𝑒 × 𝑄 𝑃𝑏𝑎𝑠𝑒

• GDP deflator shows how much a change in GDP relies on changes

in the price level.
• It reflects what is happening to the overall level of prices in the
economy.
• It measures the prices of output relative to its price in the base year.
 Measuring Inflation from GDP Deflator

• Inflation is the rate of increase in overall price level in the economy

over a given period of time (usually one fiscal year).
• Inflation is the percentage change in some measure of price level
from one period to the next. (In this case our measure of price level is
the GDP Deflator). Since inflation is the % change in GDP Deflator,

𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟𝑡ℎ𝑖𝑠 𝑦𝑒𝑎𝑟 − 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑡ℎ𝑖𝑠 𝑦𝑒𝑎𝑟 = × 100
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟
Year Output 𝑷𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝟐𝟎𝟏𝟓 Nominal Real GDP Inflation
GDP GDP Deflator Rate
2020 10 50 30
2021 14 60 30
2022 20 70 30
2023 25 40 30
2024 22 55 30

In this simple numerical example, we consider:

Economy’s production is only one output - Mangoes
2015 as base year & Prices in TK
 Exercise
Suppose, country A’s national output consists of only two goods –
Rice & Shirt. From the given data below, calculate:
Nominal GDP, Real GDP & GDP Deflator in both years.
Rate of Inflation in 2021.

Year Quantity of Rice Price of Rice Quantity of Shirt Price of Shirt

2020 80 kg 70 Tk 150 pcs 700 Tk
2021 110 kg 85 Tk 120 pcs 750 Tk
 GDP Growth

• The GDP growth rate compares the year-over-year (or

quarterly) change in a country’s economic output to measure
how fast an economy is growing.
• This measure is popular for economic policymakers because
GDP growth is thought to be closely connected to key policy
targets such as inflation and unemployment rates.
• If GDP growth rates accelerate, it may be a signal that the
economy is overheating
• Conversely a negative growth rate signals that economy is
shrinking (recession)
GDP Growth Rate

𝐺𝐷𝑃𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝐺𝐷𝑃𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 = × 100
𝐺𝐷𝑃𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟
 GDP of Bangladesh
$450.00
Billions

$400.00

Nominal GDP
$350.00
(Current USD)
$300.00

$250.00 Real GDP

(Constant 2015 USD)
$200.00

$150.00
2015 2016 2017 2018 2019 2020 2021
 Comparison of Nominal GDP
$450.00
Billions

$400.00
$350.00
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00

Bangladesh Malaysia Pakistan Singapore Vietnam

 Billions

$10,000.00
$20,000.00

$0.00
$5,000.00
$15,000.00
$25,000.00

1990
1991
1992
1993
1994
1995
1996
1997
1998

Bangladesh
1999
2000
2001
2002

Canada
2003
2004
2005
China

2006
2007
2008
2009
2010
2011
United States

2012
2013
2014
Comparison of Nominal GDP

2015
2016
2017
2018
2019
2020
2021
 Comparison of Real GDP
$400.00
Billions

$350.00

$300.00

$250.00

$200.00

$150.00

$100.00

$50.00

Bangladesh Malaysia Pakistan Singapore Vietnam

 Comparison of Per Capita GDP
$140.00
Thousands

$120.00

$100.00

$80.00

$60.00

$40.00

$20.00

$0.00

Bangladesh Malaysia Pakistan Singapore Vietnam

 Comparison of GDP Growth
14%

9%

4%

-1%

-6%

Bangladesh Canada China United States

 Shortcomings of GDP

Exclusion of Non-market Goods & Services

Exclusion of Underground Economy

Imputed Values Mis-measure GDP

Unable to Capture Changes in Quality & Inclusion of New Goods

Does not Account Leisure/Human Cost

 Shortcomings of GDP

Does not Subtract Environmental Pollution & Degradation

Composition & Distribution of Output are Ignored

Non-material Sources of Well-being are Disregarded

Fails to Represent Degree of Income Inequality

Fails to Indicate the Sustainability of Economic Growth

Alternative Measures
of Well-being
Human Development Index

• Consists of
• Life Expectancy Index
• Education Index
• Income Index
very high human development (0.8-1.0)
high human development (0.7-0.79)
medium human development (0.55-.70)
low human development (below 0.55)
 Gross National Happiness

• The primary concept of GNH is that sustainable development

should take a holistic approach towards notions of progress
and give equal importance to non-economic aspects of
wellbeing. The philosophy of GNH is based on the following
four pillars:
• Good governance
• Sustainable socio-economic development
• Cultural preservation
• Environmental conservation
GINI Index

• The Gini index, or Gini co-efficient, measures

income distribution or, wealth distribution across a
population. Developed by Italian statistician
Corrado Gini in 1912, it often serves as a gauge of
economic inequality.

• The co-efficient ranges from 0 (or 0%) to 1 (or

100%), with 0 representing perfect equality and 1
representing perfect inequality.
Country Comparison of Income Equality

Country Name Gini Index (2016) Country Name Gini Index (2016)

Finland 27.1 Canada 32.7

Denmark 28.2 Switzerland 33
Norway 28.5 Australia 33.7
Pakistan 29.6 United Kingdom 34.8
Sweden 29.6 India 34.8
Myanmar 30.7 China 38.5
Germany 31.6 Sri Lanka 39.3
France 31.9 Malaysia 41.1
Bangladesh 32.4 United States 41.1
Thank You