Measuring Total Output and Income

Read this chapter, to learn about measuring domestic output, and attempt the "Try It" exercises. The material in this chapter concentrates on the four components of GDP: consumption, investment, government purchases, and net exports. Pay attention to the definition of these components as it may differ from your expectations. For example, note that Investment does not refer to the common knowledge definition of investment as in the trading of stock and bonds. Instead, the Investment component refers mainly to the purchase of physical machinery and equipment needed in the production of goods and services. You will revisit certain sections of the chapter later in this unit.

6.3 GDP and Economic Well-Being

International Comparisons of Real GDP and GNP

Real GDP or GNP estimates are often used in comparing economic performance among countries. In making such comparisons, it is important to keep in mind the general limitations to these measures of economic performance that we noted earlier. Further, countries use different methodologies for collecting and compiling data.

Three other issues are important in comparing real GDP or GNP for different countries: the adjustment of these figures for population, adjusting to a common currency, and the incorporation of nonmarket production.

In international comparisons of real GNP or real GDP, economists generally make comparisons not of real GNP or GDP but of per capita real GNP or GDP, which equals a country's real GNP or GDP divided by its population. For example, suppose Country A has a real GDP of about $4,000 billion and Country B has a real GDP of about $40 billion. We can conclude that Country A produced 100 times more goods and services than did Country B. But if Country A has 200 times as many people as Country B (for example, 200 million people in Country A and 1 million in Country B), then Country A's per capita output will be half that of Country B ($20,000 versus $40,000 in this example).

Figure 6.7 "Comparing Per Capita Real GNP, 2010" compares per capita real GNP for 11 countries in 2010. It is based on data that uses a measure called "international dollars" in order to correct for differences in the purchasing power of $1 across countries. The data also attempt to adjust for nonmarket production (such as that of rural families that grow their own food, make their own clothing, and produce other household goods and services themselves).

Figure 6.7 Comparing Per Capita Real GNP, 2010

There is a huge gap between per capita income in one of the poorest countries in the world, the Democratic Republic of Congo, and wealthier nations such as the United States and Luxembourg.

The disparities in income are striking; Luxembourg, the country with the highest per capita real GNP, had an income level nearly 200 times greater than the Democratic Republic of Congo, the country with the lowest per capita real GNP.

What can we conclude about international comparisons in levels of GDP and GNP? Certainly we must be cautious. There are enormous difficulties in estimating any country's total output. Comparing one country's output to another presents additional challenges. But the fact that a task is difficult does not mean it is impossible. When the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.