IB DP Economics - Unit 3 - Nominal GNI as a measure of national output-Study Notes - New Syllabus

[Nominal] Gross National Income (GNI) as a Measure of National Output

Gross National Income (GNI) measures the total income earned by a country’s residents and businesses, regardless of whether the production takes place domestically or abroad, during a given period of time.

Nominal GNI measures this income using current market prices.

Meaning of GNI

GNI focuses on the income earned by nationals of a country rather than the location of production.

• Gross means depreciation is not deducted.
• National refers to income earned by residents and domestic firms.
• Income includes wages, profits, rent, and interest.

Key Idea:

• GNI measures income earned by a country’s residents worldwide.

Difference Between GDP and GNI

Although GDP and GNI are closely related, they measure different things.

• GDP measures production within a country’s borders.
• GNI measures income earned by nationals.
• GNI includes income earned abroad and excludes income earned domestically by foreigners.

GNI = GDP + Income earned by residents abroad − Income earned domestically by foreigners

Net Income from Abroad

Net income from abroad is the difference between:

• Income earned by domestic residents from overseas investments and work.
• Income earned by foreign residents within the domestic economy.

Examples of income from abroad:

• Profits earned by domestic companies operating overseas.
• Wages earned by citizens working abroad.
• Interest and dividends received from foreign investments.

Calculation of Nominal GNI

Formula:

GNI = GDP + Net income from abroad

Example Data:

Step 1: Calculate Net Income from Abroad

Net income from abroad = 70 − 20

= 50 billion

Step 2: Calculate GNI

GNI = GDP + Net income from abroad

GNI = 900 + 50

GNI = 950 billion

Conclusion:

• The country’s nominal GNI is $950 billion.

Importance of GNI

• Provides a broader measure of income than GDP.
• Useful for countries with significant overseas investments or foreign workers.
• Often used to compare living standards between countries.
• Used by international organizations such as the World Bank.

Advantages of Using GNI

• Includes overseas income earned by residents.
• Better reflects income available to citizens.
• Useful for evaluating economic welfare and national earnings.

Limitations of GNI

• Affected by inflation when measured in nominal terms.
• Does not measure income distribution.
• Ignores non-market activities and informal production.
• May not accurately reflect quality of life.

Comparison Between GDP and GNI

Key Ideas:

• Nominal GNI measures income earned by residents using current prices.
• Calculated by adding net income from abroad to GDP.
• GNI focuses on ownership of income rather than location of production.
• Useful for comparing national income and living standards.