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 The value of such sales are not included in the calculation of current GDP
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7 Income Approach to GDP
 Income approach to measuring GDP is obtained as the sum of payments to labour L and
capital K plus any net indirect taxes
 In order to produce goods and services, businesses use labour and capital (factors of
production)
 Payment must be made by business to the owners of the factors of production representing
income in an economy
 The total value added received by businesses in an economy must be either paid to labour in
the form of wages and salaries or paid to capital in some form (rent, interest, profit)
 Sum of payments to labour and capital = GDP at factor cost
 To obtain GDP we need to account for any indirect taxes that are levied on goods and
services or any subsidies that are paid
 GDP is the sum of GDP at factor cost plus net indirect taxes
o Y = labour income + capital income + (indirect taxes – subsidies)
Y = (WxL) + (RxK) + net indirect taxes
o L = labour, K = capital, W = wage per unit of labour, R = rate of return to a unit
of capital, net indirect taxes = indirect taxes – subsidies

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8 Gross National Income (GNI)
 GNI: equals the income measure of GDP plus any net factor income receivable from nonresidents
 Based on the country of origin of the factors of production
 Some of the income from GDP will accrue to foreign nationals
 GNI = GDP + net primary (or factor) income from non-residents
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9 Nominal and Real GDP
 Variations in nominal GDP over time reflect a combination of the effects of changes in the
quantity or volume of goods and services produced and their current prices
 Value of nominal GDP: values quantities of goods and services produced at their current
year (or year of production prices)
 Real GDP uses final goods and services prices for a common base year to value the
quantities produced in other years
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10 Nominal, Real GDO and the GDP price index
 Nominal GDP = real GDP x GDP price index
 Can be used to compute a price index or deflator for GDP, if we have values for nominal and
real GDP we can use those to compute a price index for GDP as:
𝒏𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 =
𝒓𝒆𝒂𝒍 𝑮𝑫𝑷
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11 Growth in Real GDP
 Commonly used as an indicator of economic progress
𝒓𝒆𝒂𝒍 𝑮𝑫𝑷 𝒑𝒆𝒓 𝒄𝒂𝒑𝒊𝒕𝒂 =

𝒓𝒆𝒂𝒍 𝑮𝑫𝑷
𝒑𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏

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12 GDP and Economic Welfare
 GDP is an incomplete measure of the general concept of economic welfare
 There are many factors that can affect people’s economic welfare which aren’t measure by
GDP, GDP omits many non-market activities
 Economic welfare depends on distribution of income and degree of income inequality
 One approach to adjust this is to adjust the GDP to try and capture more of the depreciation
costs
 Second approach involves arguments GDP with a variety of other economic and social
indicators
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14 Business Cycles
 The business cycle is used to describe general or widespread variations in the rate utilisation
of resources in an economy
 A recession occurs when there are at least two consecutive quarters of negative economic
growth, has to fall for at least quarters
 Contraction: period of level of GDP falls
 Expansion: period of level of GDP rises
 Peak: beginning of contraction, high point of
GDP prior to a downturn
 Trough: end of contraction, low point of
GDP prior to an uptown

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15 Technical Recession
 Much simpler method for defining and identifying a recession is a technical recession
 Technical recession: defined by the simple rule of at least two consecutive quarters of
negative growth in real GDP

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