Introduction to

Economics II
3rd lecture
Two big topics for today
1. Macroeconomic
indicators

2. National accounts
Macroeconomic
indicators
 What is the most common
abbreviation in macroeconomics?
The GDP
Stands for?

 gross domestic product

Definition:

The total market value of final goods and services produced in a country during a year.

 part of the national accounts (economic country statistics)

 a „picture on the overall state” of a country; the most comprehensive measure

 the level of economic development of a country  GDP per capita: a country's GDP
divided by its total population
Origins of the GDP
• Simon Kuznets (1901-1985) is often credited
with the invention
( Best known for his contribution to the
transformation of economics into an empirical
science and to the formation of quantitative
economic history, as well as for the „Kuznets
curve”.)
• the modern definition of GDP was developed
by John Maynard Keynes during the second
world war
• it was a measure created to assess wartime
production capabilities of a nation
Simon Kuznets
Elements of the GDP
GDP = the total of consumption (C)
and investment goods (I), government
purchases (G), and net exports (NX) to
other lands:

GDP = C + I + G + NX

The difference between aggregate

demand (AD) and GDP:
 GDP is for a period of time, whilst
AD is for a point in time.
Calculating the GDP – two different
approaches – simplified example (C)
A FLOW OF GOODS THE SUM OF EARNINGS
 also called: expenditure  also called: income approach, cost
approach approach
 include only final goods —goods  the annual flow of the earnings
ultimately bought and used by
consumers that households receive from firms
 add together all the  wages, interest, rents, and profits
consumption dollars spent on
these final goods, and you will
arrive at this simplified economy’s
total GDP
The two approaches are
equivalent in their end-sum.
Where does the data come from?
 surveys
 income-tax returns
 retail-sales statistics
 employment data
 business accounts
• account - definition: A numerical record of all flows (outputs, costs, etc.)
during a given period.
 The national accounts add together or aggregate the outputs and costs
of the firms to get the measures of GDP.
Who calculates the GDP?
 the national statistical
agency
• For example: the
Hungarian Central
Statistical Office
 regional and global GDP
are calculated by
international organisations
• such as the IMF
Hungarian Central Statistical Office
Double counting – a problem
• Intermediate goods: goods that are used up
to produce other goods.
GDP excludes intermediate goods!
Examples:
• includes bread but not flour
• home computers but not computer chips
 intermediate products are cycling around
inside the block marked “Producers” on the
previous illustration
 if they are not bought by consumers, they
never show up as final products in GDP
The function of „value added” in the
income approach
What do we mean by value added?
 The difference between a firm’s sales and its purchases of materials and services
from other firms.
Why is it important in the income approach of GDP measurement?
 Because by counting only the „value added” by each firm, we can avoid double
counting.
Where is it particularly important?
 In supply/value chains.
In such chains, one firm’s „value added” counts into the purchases of other firms.
The problem of changing prices
GDP is measured with prices.

But market prices change over time… (~ inflation, mostly)

How can we measure GDP „objectively”?

 We „remove” the price increase component.

 We distinguish between nominal and real GDP.

Nominal and real GDP
Measuring the GDP for a particular year using the actual market prices of that year:

 NOMINAL GDP

But an increase in nominal GDP can be due to price increases only.

 So we are more interested in the REAL GDP.

REAL GDP - definition: An inflation-adjusted measure that reflects the value of all
goods and services produced by an economy in a given year, expressed in base-year
prices.

But how do we calculate it?

Calculating real GDP
1. A base year is given/chosen.
2. The price level of the base year is compared with that of the current year, which
we are calculating the real GDP for.
3. That comparison gives us a value, that of the so-called GDP deflator. (Also called:
price deflator. This value is usually provided for calculations.)
4. We obtain the value of the real GDP through dividing the nominal GDP by the GDP
delfator:

nominal GDP
Real GDP =
GDP deflator
Exercise 1
The nominal GDP for a country in 2020 was: $ 117.8 billion.
The value of the GDP deflator is: 0.76
Task:
Calculate the real GDP.
Solution:
nominal GDP
Real GDP = = 117.8 / 0.76 = 155
GDP deflator
Answer:
The real GDP was $ 155 billion for the year 2020.
Exercise 2
Period Nominal GDP Real GDP
Questions:

Year 1 $ 120 billion $ 130 billion 1. Which year was the base year?

2. Was there inflation in year 3?

Year 2 $ 150 billion $ 150 billion
3. Has output actually increased
Year 3 $ 160 billion $ 140 billion between years 2 and 3?
Exercise 2 - solutions
Answers:

1. Which year was the base year?

The base year is where the nominal and the real GDP are
equivalent.  Year 2, in this case.

2. Was there inflation in year 3?

Year 3’s GDP deflator has the value of 1.14 (compared to

1.00 for Year 2), thus there was inflation.

3. Has output actually increased between years 2 and 3?

No, the real GDP has declined.

More about the real GDP
• Its growth rate is often used as an indicator of the general health of the economy.

• When real GDP is growing strongly  employment is likely to be increasing.

• When it is shrinking  employment often declines.

• Real GDP growth does move in cycles over time. ~ business cycles

• Let’s look at some World GDP data. 

Not included in the GDP
o unpaid work
(household
management,
childcare,
volunteering)
o black/grey-
market activities

Why are they not included?

 difficult to measure and value accurately
What else does the GDP not reveal?
• the overall standard of living or well-being of a country
 it does not capture things that may be important to general well-being
What could be such things/factors? (both positive and negative)
• environmental damage
• the reduction of leisure time
• inequality
• life expectancy
• literacy
• school enrollment
• the quality of experience (services)
• how people „pay” with their data
The importance of the GDP - criticism
• policymakers and economists often treat GDP as an all-encompassing unit

 but limitations have to be acknowledged

• policies that result in economic growth are seen to be beneficial for society

 ignores the negative „effects” of economic growth (climate change, inequality)

• a GDP overemphasis is a production/growth-fixation

Attempts to account for some of the
shortcomings of the GDP
Index Origin Why it’s different
Human Development United Nations encapsulates health and knowledge too
Index
Genuine Progress Indicator ecological incorporates environmental and social factors
economics
Gross National Happiness Bhutan equitable socio-economic development, good
Index governance
Ease of Living Index India quality of life, economic ability, sustainability

 In general: include externalities, focus on „living beings”.

 But these indices have their own critics too…
Discussion question

How much significance, do you think, should we

give to the GDP as an economic measure?
How can we „handle” it effectively?
Further indicators
 net domestic product  gross national product (GNP):
(NDP): Obtained by The total output produced with labor
subtracting depreciation or capital owned by the given country’s
from GDP. citizens (also those working abroad).
NDP = GDP – depreciation • the difference between GNP and
• difficult to estimate GDP: GDP is the output produced with
labor and capital located inside the
 that’s why economists given country.
tend to use the GDP instead
GDP vs GNP – testing what we just
learned
Complete these two sentences:

Some of the Hungarian … is produced in Suzuki plants that are owned by Japanese
corporations operating in Hungary.

The profits from these plants are included in the Hungarian …, but not in the
Hungarian … because Suzuki is a Japanese company.
GDP vs GNP – testing what we just
learned - solution
Complete these two sentences:

Some of the Hungarian GDP is produced in Suzuki plants that are owned by Japanese
corporations operating in Hungary.

The profits from these plants are included in the Hungarian GDP, but not in the
Hungarian GNP because Suzuki is a Japanese company.
Further „accomplices” of the GDP
 GNI - Gross National Income:  GNDI - Gross National Disposable
Income:
The total amount of money earned
by a nation's people and businesses The income available to the nation
(GDP + transfers). for final consumption and gross
saving.

 NNI - Net National Income:

 NNDI - Net National Disposable
GNI – depreciation Income:
GNDI - depreciation
What other indicators can characterize an
economy?
 Other key indicators – with Hungarian
data as an example (sources linked)
 inflation:  employment rate:

74.3 % (January 2024)

6 % (end of 2023)
 a measure of the extent to which available labour
 unemployment rate:
resources are being used
4.1 % (October 2023)
 public debt (as a GDP ratio):
 the share of workers in the labor force
75.2 % (2023 Q2)
who do not currently have a job but are
actively looking for work  the financial liabilities of the government sector
National Accounts
The System of National Accounts (SNA)
• SNA definition:
The internationally agreed standard set of recommendations on how to compile
measures of economic activity.
• characteristics:
coherent, consistent and integrated
• content:
concepts
definitions
classifications
accounting rules
What else it shows
• an overview of economic processes

 how production is distributed among consumers, businesses, government and

foreign nations

 how income originating in production, modified by taxes and transfers, flows to

these groups

 how they allocate these flows to consumption, saving and investment

More about the SNA
• the 2008 methodology is in current use (latest version) – 2025 next
• origins: 1993 - compiled by the International Monetary Fund (IMF), the
European Commission, the Organization for Economic Cooperation and
Development (OECD), the United Nations, and the World Bank
• contains multiple indicators, macroeconomic statistics
• the GDP is especially important
• a basis for economic analysis and policy formulation
The European System of Accounts: ESA
• the EU has its own system 
European System of Accounts:
ESA
• description:
The system of national
accounts and regional accounts
used by members of the
European Union.
• the 2010 version is the latest
Assigned reading and recommended materials
 Samuelson-Nordhaus textbook, pp. 386-394 (= pdf pages 409-417), 396-397 (= pdf
pages 419-420)
Recommended:
 Gross Domestic Product: An Economy’s All – IMF article
 GDP Is Not a Measure of Human Well-Being – Harvard Business Review
 The System of National Accounts – UN Stats

Useful sites:
• www.oecd.org
• www.ec.europa.eu/eurostat
• www.data.worldbank.org
• www.cia.gov/the-world-factbook/
Do you have any
questions?
Thank you for your kind attention.