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5 (a) Distinguish between Gross Domestic Product (GDP) and Gross National Income (GNI) as methods of calculating National Income - Leaving Cert Economics - Question 5 - 2020
Question 5
5 (a) Distinguish between Gross Domestic Product (GDP) and Gross National Income (GNI) as methods of calculating National Income. (b) Which is a more accurate measu... show full transcript
Worked Solution & Example Answer:5 (a) Distinguish between Gross Domestic Product (GDP) and Gross National Income (GNI) as methods of calculating National Income - Leaving Cert Economics - Question 5 - 2020
Step 1
Distinguish between Gross Domestic Product (GDP) and Gross National Income (GNI) as methods of calculating National Income.
Answer
Gross Domestic Product (GDP) and Gross National Income (GNI) are both methods used to calculate national income, but they differ in their focus and components.
1. Definition:
- GDP refers to the total monetary value of all final goods and services produced within a country's borders in a specific time period. It emphasizes production within the national economy.
- GNI, on the other hand, includes the total income earned by residents of a country, regardless of where it was produced. This means that GNI accounts for net income from abroad, subtracting income earned by foreign residents in the domestic economy.
2. Calculation:
- GDP can be calculated using three approaches: production (output), income (factor payments), and expenditure (sum of final expenditures).
- GNI is calculated by taking GDP and adjusting it by adding net income from abroad (income earned by residents in foreign investments minus income earned by foreign investors in domestic assets).
3. Economic Indicators:
- GDP is often seen as an indicator of economic health and activity within a country's borders and is frequently used to gauge economic performance.
- GNI provides a broader understanding of the economic well-being of a country's residents, as it considers international income flows.
4. Policy Implications:
- GDP focuses on production policies, such as industrial growth and consumer spending.
- GNI highlights the importance of international trade and income from investments, which might lead to different policy approaches regarding foreign relations and investment strategies.
Step 2
Which is a more accurate measure of measuring National Income, GDP or GNI?
Answer
In determining which measure is more accurate for assessing national income, GNI is often viewed as a more comprehensive indicator of a country's economic health and the well-being of its residents. While GDP effectively measures the economic activity occurring within national borders, it does not account for income earned abroad or the economic contributions of resident nationals working overseas.
1. Comprehensive Understanding:
- GNI captures the total income of residents, including both domestic and foreign income streams. This inclusion makes GNI a better reflection of the economic resources available to residents for consumption and investment.
2. Economic Connections:
- In global economies where many citizens might earn income from international sources, GNI provides a clearer picture of their financial situation compared to GDP, which may understate the income levels available to a nation's residents due to overlooking foreign earnings.
3. Policy Decisions:
- Policymakers may find GNI more useful in designing economic policies aimed at improving the livelihood of their citizens, especially in scenarios where international income is significant relative to domestic output.
In summary, while GDP serves as an important measure for gauging immediate domestic productivity, GNI is often more accurate for assessing overall national income due to its inclusive approach, capturing the total income available to residents.