The International Economic Environment

Chapter - 3
Definition of GDP
Gross domestic product (GDP) is the market value of all
officially recognized final goods and services produced within a
country in a given period.

GDP per capita is often considered an indicator of a country's

standard of living.
GDP per capita is not a measure of personal income.
Under economic theory, GDP per capita exactly equals the gross
domestic income (GDI) per capita.
 GDP measurement techniques
GDP can be determined in three ways, all of which
should, in principle, give the same result. They are-

1. The product (or output) approach,

2. The income approach, and
3. The expenditure approach.

Example: the expenditure method:

GDP = private consumption + gross investment +
government spending + (exports − imports), or
GDP= C+I+G+(X-M)
 Production approach

According to this approach GDP is the market value of all

final goods and services calculated during 1 year .
The production approach is also called as Net Product or
Value added method. This method consists of three stages:
1. Estimating the Gross Value of domestic Output in various
economic activities.
2. Determining the intermediate consumption, i.e., the cost of
material, supplies and services used to produce final goods
or services; and finally
3. 3. Deducting intermediate consumption from Gross Value
to obtain the Net Value of Domestic Output.
 Income approach

According to this approach GDP is the sum total of incomes of

individuals living in a country during 1 year .
National Income and Expenditure Accounts divide incomes into
five categories:
•Wages, salaries, and supplementary labor income
•Corporate profits
•Interest and miscellaneous investment income
•Farmers’ income
•Income from non-farm unincorporated businesses
 Expenditure approach

According to this approach GDP is the all expenditure

incurred by individuals during 1 year .
In economics, most things produced are produced for
sale, and sold. Therefore, measuring the total
expenditure of money used to buy things is a way of
measuring production. This is known as the
expenditure method of calculating GDP.
Factors to be considered in comparing inter- country GDP figures

•Larger countries tend to have higher total GDPs, therefore a better

comparison is GDP per head or GDP per capita.
•GDP needs to be considered in real terms rather than nominal
terms.
•GDP needs to be converted into a common currency such as-
American dollars.
•GDP figures can only include factors on which there is
information.
•GDP figures do not make reference to the distribution of income
between countries.
•GDP figures make no reference to the social costs of production.
 GDP VS GNP
Factor GDP GNP
Stands for Gross Domestic Product Gross National Product

Definition: An estimated value of the An estimated value of the total

total worth of a country’s worth of production and
products and services, on its services, by citizens of a
land, by its nationals and country, on its land or on
foreigners, calculated over foreign land, calculated over the
the course on one year course on one year

Formula for GDP = consumption + GNP = GDP + NR (Net income

Calculation investment + (government inflow from assets abroad or
spending) + (exports − Net Income Receipts) - NP (Net
imports) payment outflow to foreign
assets)
Uses: Business, Economic Business, Economic Forecasting
Forecasting

Application To see the strength of a To see how the nationals of a

country’s local economy country are doing economically

Layman Total value of products & Total value of Goods and Services
Usage: Services produced within produced by all nationals of a
the territorial boundary of a country (whether within or outside
country the country)

Country Qatar ($98,948) Qatar ($87030)

with Highest Bangladesh ($1909) Bangladesh ($ 840)
Per Capita
(US$):
 Macroeconomic goals
In general, the governments of most countries have four major economic goals,
not all of which are mutually compatible. These are:
•A high level of economic growth
•A strong balance of payments
•A low level of inflation
•A low level of unemployment
Governments have a range of economic policies which they can use to achieve
their targets. For example, a government that wishes to improve the sales of its
domestic industries could try and stimulate its domestic economy by-
i. Reducing taxes
ii. Increasing the amount of money
iii. Erecting trade barriers
iv. low interest rate
v. Subsidy
vi. Low export tax
 Structural changes in major economies
By structural change we mean how the sectors in an economy
have changed. It is useful to give some broad definitions of these
sectors:
1. The primary sector includes activities directly related to
natural resources, for example farming, mining, and oil
extraction
2. The secondary sector covers production industries in the
economy such as manufacturing, the processing of materials
produced in the primary sector and construction
3. The tertiary sector includes all private sector services, for
example banking, finance, computing services and tourism as
well as public sector services such as health and defense
 Inflationary pressures
Inflation may be defined as a persistent increase in prices over
time- in other words, the rate of inflation measured the changes in
the purchasing power of money.
One method of measuring inflation is the changes in the Retail
Price Index (RPI). The RPI measures the change in prices from
month to month in a representative ‘basket’ of commodities
bought by the average consumer. The commodities in the basket
are weighted differently to indicate the proportion of expenditure
made by the average consumer on various items.
 The causes of inflation
•Increases in costs of labor that are not linked to
increases in labor productivity
•Increases in the costs of raw materials which could
come about different stages of the economic cycle, where
the demand for raw materials may outstrip supply in the
short term
•A deterioration in exchange rates which tends to cause
import prices to rise
The role of government in the economy:
 Controlling inflation
 Stable economic growth
 Reducing unemployment
 A favorable balance of payments.
 Stable exchange rate
 Control of government borrowing
 Unemployment
If everyone who want a job and is capable of doing a job is
able to find one, then this is called full employment . However,
when there is a significant amount of capable people in a
country can not find a work to do is called unemployment.
Reason behind increase of unemployment level:
1. Technological unemployment
2. Cyclical unemployment
3. Structural unemployment.
 Unemployment
1. As technology advances further there is an increasing problem of
labor being replaced by new technology – a concept known as
Technological unemployment.
2. Increased unemployment also leads to a decrease in the demand
for goods and services causing further increases in unemployment
and still further reduction in demand. Economists refer to this type
of unemployment as cyclical unemployment.
3. Industries such as mining, ship building, agriculture and so on,
where demand for such products may well be met by imports from
other countries with businesses capable of maintaining lower
production costs caused Reason behind increase of unemployment
structural unemployment.
THANKS