national production

INTRODUCTION

Macroeconomic theory began developing and gaining popularity following the recession in 1929. The economic downturn continued for more than five years and an unemployment rate of up to 25% was recorded in the United States of America. This meant that every one out of four persons was unemployed or did not work and that was indeed a very high rate of unemployment. Therefore, famous economists, headed by English economist named John Maynard Keynes, suggested that a macro view be taken to solve problems. This view is used since the microeconomic theory used prior to this could not overcome the high unemployment rate. Hence, macroeconomic theory started to flourish.

TTooppiicc

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National Production

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1. Explain the circular flow of the income model;

2. Compare gross domestic product (GDP) and gross national product(GNP);

3. Illustrate how gross domestic product (GDP) is calculated;

4. Distinguish the difference between real GDP and nominal GDP; and

5. Discuss four problems that arise during the measurement of nationalproduction.

Copyright © Open University Malaysia (OUM)

TOPIC 2 NATIONAL PRODUCTION

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From time to time, other problems which needed to be solved using the macro view cropped up, such as inflation and deficit. Without inflation and unemployment, the system of free market economy cannot measure the stability in the economic activity that is carried out. The existence of such problems helps open up more room for macroeconomics to grow. In this topic, the focus will be on the main issue of macroeconomics, which is national production. Let us learn more about national production in this exciting new topic.

CIRCULAR FLOW OF INCOME MODEL

The main aim of a countryÊs economic activity is to ensure that all its peopleÊs needs for goods and services are satisfied. Nothing is more important than providing shelter, food, clothing, education and recreation for each and every citizen. Before you continue reading, think for just a moment about how economic activities are measured.

A countryÊs economic activity is usually measured based on the countryÊs overall output.

Before we look further into the concept of national production, it is important for you to understand circular flow of the income model as shown in Figure 2.1. The model shows the simplest economic activity involving two parties, namely, the household and the firm.

Figure 2.1: Circular flow of income model

2.1

National production and national output mean the same thing; namely, these terms refer to the final products/goods and services produced by a country during a specific period of time, such as a year.


TOPIC 2 NATIONAL PRODUCTION 19

Figure 2.1 shows the circulation of physical goods (products and resources) and cash between households and firms. Every circulation of physical goods will be followed by a circulation of cash in the opposite direction. The circulation of resources (production factors such as land, capital, labour and entrepreneurs) from households to firms will be followed by cash being circulated from the firms to the households. Resources possessed by households that are utilised by firms in the production process will be paid for by the firms. The circulation of goods from the firms to households will also be followed by circulation of cash from households to the firms, which represents the payment for the goods purchased by households from the firms.

GROSS DOMESTIC PRODUCT (GDP)

Every country has its own method of evaluating its economic activity. One thing is certain, the process undertaken to do this is certainly not a simple one. The same goes for Malaysia. Malaysia has its own method of measuring the total output and the ins and outs of practiced economic activities. Have you ever given it a thought? How does the Malaysian government measure national production? One national production concept that Malaysia applies is the Gross Domestic Product (GDP). What does it stand for?

2.2

Gross domestic product (GDP) means the total market value of all final goods and services produced within the borders of a nation during a specified period.

ACTIVITY 2.1

We always hear the term „gross domestic product‰ being mentioned ineconomic news over the electronic media. What do you understandabout gross domestic product?



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There are four important elements of GDP, as shown in Figure 2.2 below.

Figure 2.2: The four important elements of GDP

The explanation for these four elements of GDP are in the following subtopics.

2.2.1 Total Value of Production

In order to calculate the total value of production, you will have to add the value of all the goods. For example, the value of an orange is added to the value of a computer, a car, a washing machine and so on. The GDP values of goods are based on their market prices. The market price is the price at which an item, service or asset is exchanged in a market system.

2.2.2 What are the Final Goods and Services Produced?

The GDP calculations only take into account the market price of the final goods and services. Final goods and services are those that are actually used or consumed by individuals, households, firms or the government and will not be used as components in producing other goods and services. In other words, they are not intermediate goods and services.

Example 2.1:

If an orange is sold for 30sen and the price of a computer is RM1,000, then the value of 100 oranges and five computers is RM5,030, which is equivalent to RM30 for the oranges and RM5,000 for the computers.



2.2.3 Where are They Being Produced?

Only goods and services produced within the boundaries of a country will become part of the GDP of that country. Therefore, goods and services produced in Malaysia are part of MalaysiaÊs GDP.

2.2.4 When are They Produced?

GDP concerns only the production of new goods and services during a particular period. Usually, the period is every three months or a year. Only the final products and services produced during that period of time will be taken into consideration for the GDP. GDP not only measures the total value of production, but it also calculates the total revenue and total expenditure of a country.

Example 2.4:

In Malaysia, Bank Negara uses the quarterly data to detect any changes in short-term economic activities. Economists, on the other hand, use annual data to evaluate the growth in long-term economic activities.

Example 2.3:

Nike, an American company, produces clothing in Malaysia. The value of the clothing produced in Malaysia is part of MalaysiaÊs GDP and not the GDP of the United States.

Petronas, a Malaysian oil company, produces oil in Vietnam and contributes towards VietnamÊs GDP and not ours.

Example 2.2:

Proton Waja (MalaysiaÊs national car) is the final product but the tyre it uses is an intermediate good. GDP only considers the goods that are being sold in the market. Therefore, goods produced for your own consumption are not taken into account by GDP.



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GROSS NATIONAL PRODUCT (GNP)

How about gross national product (GNP)? What do you understand about it? How is it different from GDP? Let us continue to find out the answers. Another concept used to measure the production of a country is the Gross National Product (GNP). In other words, GNP does not take into account the value of output produced by a foreign firm even though the production operation is carried out within the country.

For example, the value of clothing produced by Nike in Malaysia is not included in the calculations for MalaysiaÊs GNP. Instead, it is used in the calculations of AmericaÊs GNP.

2.3

Gross national product (GNP) means total market value of final goods and services produced by a countryÊs nationals using their own resources, regardless of whether the production operations are carried out within or outside the country.

True (T) or False (F) Statements 1. National production means goods and services produced within

the borders of a nation during a specified period. __________ 2. In measuring the value of production, GDP values production

during a certain time frame only. Usually, the period is every sixmonths or three years. __________

3. Gucci is an American brand. The value of clothing they produce in

Malaysia is part of AmericaÊs GDP and not ours. __________ 4. Goods and services produced in Singapore are counted as part of

SingaporeÊs GDP. __________ 5. In order to calculate national production value, GDP values the

goods based on market price. __________

EXERCISE 2.1



Similarly, the petroleum produced by Petronas in Vietnam is not added into VietnamÊs GNP. Instead it is added to ours. Here is a simple formula for GNP:

METHOD OF CALCULATING GDP

Generally, there are three approaches for measuring GDP, namely expenditure approach, production approach and income approach. Although the methods are different, they give the same value. Let us look at these approaches further in the following subtopics.

2.4

GNP = GDP + income earned by domestic residents through foreign investments - income earned by foreign investors in the domestic market

ACTIVITY 2.2

While walking in shopping malls, you must have seen business premisesof branded goods like Gucci, Laura Ashley, Guess, Dorothy Perkins,Topshop, Nike and such. After studying the concepts of GDP and GNP, in your opinion, what arethe contributions made by these businesses towards MalaysiaÊs economicgrowth?

EXERCISE 2.2

1. State the difference between GDP and GNP. 2. A product was made in 2002 but sold in 2003. Which year will it be

accounted into for the purpose of calculating the GDP? 3. For a developing nation like Malaysia, which value would be

higher, GDP or GNP?



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2.4.1 Expenditure Approach

Firstly, let us learn the definition of „Expenditure Approach‰.

There are four groups that purchase final goods and services, namely, households, firms, government and overseas consumers. The expenditure of these four groups can be divided into four categories, namely, personal consumption expenditures, gross investment, government purchases of final goods and services, and net exports. Figure 2.3 shows the four categories of expenditure.

Figure 2.3: Four categories of expenditure

The description for each category of expenditure is explained in Table 2.1.

Expenditure approach sums up the total expenditure in a country (of individuals, firms and government). The total is derived from the final demand for goods and services.



Table 2.1: Description of Four Categories of Expenditure

Expenditure Description

Personal consumption expenditures

This category includes expenditures by households on final goods and services. This includes expenses for food, laundry, rental and so on.

Gross Investment

This category refers to investment by firms on capital equipment like machines, and buildings, and addition to inventories. Production that cannot be sold also adds on to the inventory and thus, is included in investment. Purchase of shares and bonds are not considered as investments since these are not purchase of final goods or services.

Gross Investment = Net investment + Depreciation of capital assets.

Government purchases of final goods and services

This category refers to central and local government purchases of goods and services from the private sector. In order to function effectively, the government has to purchase goods and services produced by firms.

For example, government buys computers, paper, pens and ammunition. All these goods are necessary for the government to function effectively.

Net exports This category reflects total exports minus total imports (X – M). If the total value of exports exceeds total imports, then the net exports is a positive value. Instead, if the exports value is less than the imports value, then the net exports is a negative figure.

Some goods produced locally cannot be sold in the country. Similarly, some goods required by the people are not produced locally and therefore, need to be imported from overseas.

Therefore, the total expenditure for the final goods and services produced by a country is the sum after adding all the four categories as listed below.

Personal consumption expenditures = C

Investment = I

Government purchases of final goods and services = G

Net Exports = X – M

Total Expenditure = C + I + G + (X – M) = GDP



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Total expenditure represents the value/sum received by the firms that produce the final goods and services.

2.4.2 Production Approach

By looking at Figure 2.4, what can you describe about production approach?

Figure 2.4: Production approach

According to the production approach, all the values of final goods and services from the various economic sectors are added. Figure 2.4 shows examples of sectors found in Malaysia. For your information, in Malaysia, the economic sector can be divided into three groups, namely, the main sector, the industrial sector and the service sector. The information on the value of production in each of these sectors is obtained through census. This approach uses the concept of adding up all the values to avoid the problem of counting a value twice.



What does the problem of counting a value twice stand for?

What is the impact of this problem? This problem can cause the GDP to be over estimated and the value will not reflect the actual figure. To make it easier for you to understand, let us refer to Example 2.5. Table 2.2 is your guide to the example.

Table 2.2: Value Added Method

Process Value Added (RM) Value Added (RM)

Firm I – Cotton to thread

Firm II – Thread to cloth

Firm III – Cloth to dress

TOTAL

100

150

230

100

50

80

230

Example 2.5:

Assume that there are three steps to produce a dress. In the first process, cotton is processed into thread and sold to Firm II for RM100. At this stage, a value of RM100 is produced (assuming that the cotton is obtained for free). Firm II then produces cloth using the thread and sells it to Firm III for RM150. This process adds a value of RM50 to the original RM100. Subsequently, cloth is made into a dress in this third stage of production. This dress is then sold by Firm III to consumers for the price of RM230. Therefore, a value of RM80 has been added on to the price for which the cloth was purchased. According to the production approach, only the final value of production is taken into account when calculating the national income. In this case, only the final figure of RM230 is taken. If the values of the intermediate goods are considered (example, the 100 + 150 + 230), this would mean the values are added twice and the national income would be over estimated.

The problem of counting a value twice is a situation whereby the value of a good is counted more than once when measuring the GDP.



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2.4.3 Income Approach

How do we use the income approach in measuring GDP? Measuring GDP using the income approach means to sum up the incomes that firms pay households for the factors of production they hire, for example, labour, land, capital and entrepreneurs. This approach divides income into five categories as explained in Table 2.3.

Table 2.3: Five Categories of Income Approach

Income Approach Explanation

Compensation of employees

Compensation of employees means wages paid to employees. It includes net wages and salaries added to fringe benefits paid by the employer such as health insurance, social security contributions and gratuities/pension fund contributions.

Net interest Net interest means the interest payments on deposits made by banks to the customers/households. This payment must deduct the interest paid by customers/households for loans taken.

Rental income Rental income means total rent collected for the use of land and other input. It includes payment of house rental and estimated rental which should be paid by those who live in their own homes.

Corporate profits Corporate profits means the measure of profit earned by the household sector for supplying entrepreneurship services through corporations. The corporate profits paid as dividends and profits that are not divided are considered income.

ProprietorsÊ income A proprietor is someone who owns his own business. His income includes the total of all four sources of income stated above.

ProprietorsÊ income is difficult to divide into compensation of employees, rental income and profits. Therefore, it is combined into a single category named proprietorsÊ income.

We can conclude that the national income is measured by adding the total of all income above, as shown in the following formula.



ADJUSTING FACTOR COST TO MARKET PRICE

In the process of calculating the GDP, the expenditure approach values the goods and services at market rates whereas the income approach values them based on the factor cost of production used to produce the goods and services. Indirect taxes and subsidies are two elements that differentiate market prices from the factor cost. Sales tax causes the value of market prices to be more than the factor cost whereas subsidies make the factor cost higher than market prices. In order to adjust the factor cost to market prices, indirect taxes have to be added and subsidies have to be deducted as shown in the following formula.

2.5

National Income


+ Net interest

+ Rental income

+ Corporate profits

+ ProprietorsÊ income

= GDP

SELF-CHECK 2.1

Give the meanings of each method below using your own words.

Income Approach Category Meaning


Net interest

Rental income

Corporate profits

ProprietorsÊ income



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Let us look at Example 2.6, which shows you how to calculate the value of GDP for county X at market price.

ECONOMIC ACTIVITIES THAT ARE NOT INCLUDED

2.6

Factor Cost + (Indirect Taxes – Subsidies) = Market Price

Example 2.6:

Information below concerns the national income of X.

GDP at factor cost [GDP (fc)] = RM100 million Indirect taxes = RM25 million Subsidies = RM7 million

What is the value of GDP for country X at market price?

Answer

GDP (mp) = GDPfc + indirect taxes – subsidies = RM100 million + RM25 million – RM7 million = RM118 million

Therefore, GDP at market price for country X is RM118 million.

EXERCISE 2.3

1. State THREE methods for calculating GDP. 2. How can the value of factor cost be adjusted to market value?

ACTIVITY 2.3

What is your opinion on the traditional agricultural production that isbeing carried out in the villages? This refers to farmers who do not selltheir agricultural produce and instead consume them for theirhousehold needs. How can these economic activities be measured?



In measuring the GDP, only the production value from economic activities that are productive, legal and marketed are considered. There are economic activities that are unproductive, illegal and not marketed. The following subtopics explain four examples of activities which are not included in the calculation of GDP.

2.6.1 Traditional Farmer’s Agricultural Produce

In traditional farming, some of the output produced is used for farmersÊ own consumption. Although this economic activity is productive, it is not marketed. Therefore, this type of farming on a smaller scale is not included in the calculation of GDP. Figure 2.5 shows paddy planting as an example of traditional farming.

Figure 2.5: Traditional farming: Paddy planting Source: http://images.google.com.my

2.6.2 Illegal Activities

Although activities such as drug trafficking, prostitution, gambling or black market trade are all productive and generate a lot of money, they are not included in the calculation of GDP. This is because these activities are illegal.

2.6.3 Productive Activities that are Not Paid

Are you aware that there are productive activities that are not paid for? For example, housework done by a housewife is not paid for and thus, difficult to be valued. Therefore, it is not included in the calculations of GDP. However, if the job is given to a maid and she is paid for the work done, then it will be accounted for in the GDP.



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2.6.4 Non-cash Rewards

It is quite normal for a company manager to receive partial benefits in the form of something other than cash, for example, free hotel stay or transportation. Although this increases his real income, it is still not included in the calculations for GDP.

Besides those activities that are not included in the measurement of GDP, there are also limitations of the GDP concept in terms of social welfare. As we know, an increase in GDP is a good thing and it is one of the main objectives of the macroeconomic policy. However, can we use the GDP concept as a measure of welfare? A decrease in crime levels in one country definitely improves social welfare but crime levels are not measured in GDP. If the crime levels decreased, society would be better off, but a decrease in crime is not an increase in output, thus it is not reflected in GDP. Similarly in the case of pollution, GDP does not reflect losses. It simply shows that GDP is higher, when more output is produced despite the effects of pollution on society.

REAL GDP AND NOMINAL GDP

The value of GDP for a country changes from time to time. The same goes for prices that keep fluctuating from time to time. Information pertaining to the increase in production is important. Thus, the element of change in pricing has to be set aside from the national production value. The isolated data which shows the price difference is more meaningful to economists and policy-makers as it reflects the actual economic activities.

There are two types of GDP; real and nominal. Let us check out their definitions.

To make it easier for you to understand these two concepts, let us refer to Table 2.4. Imagine that country X only produces two goods, namely food and clothing. Table 2.4 shows the quantity and prices for these two items for the year 2001 and 2002.

Nominal GDP means measuring the value of all the goods and services produced expressed in current prices. Price change will affect the GDP value.

2.7

Real GDP means the GDP value does not have any element of price change in its calculations. The GDP is measured based on fixed prices.



Table 2.4: Quantity and Prices

Year Quantity (Unit) Price

Food Clothing Food Clothing

2010 5 10 RM20 RM15

2011 7 12 RM22 RM15

Based on the information in Table 2.4, the nominal GDP value, which is the value of goods produced for a specific year for a country during 2010 and 2011, is stated as follows:

While the Real GDP for the year 2010 based on the price for 2010 is:

Since the price used is the same, which is the price for the year 2010, the values of real GDP and nominal GDP are the same at RM250. Based on the pricing for 2010, the real GDP value for 2011 is:

Comparatively, the value of real GDP for the year 2011 is lower than the nominal GDP value for the same year. This is owing to the increase in food prices from 2010 to 2011.

Real GDP can be measured using a constant price at any year. In the year 2011, the real GDP can also be measured based on the 2011 pricing.

The rate of growth in real GDP between 2010 and 2011 can be calculated as follows:

(5 Food RM20) + (10 Clothing RM15) = RM250.

(7 Food RM20) + (12 Clothing ×RM15) = RM320.

Year 2010 (5 Food RM20) + (10 Clothing RM15) = RM250.

Year 2011 (7 Food RM22) + (12 Clothing RM15) = RM334.

(RM320 – RM250) / RM250 100 = 28%.



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The value of 28% shows the average growth rate for both food and clothing for country X.

NATIONAL PRODUCTION DATA USAGE

National production data reflects a countryÊs overall economic activities. It is very useful for many parties. As for Malaysia, these parties can be the government, policy-makers and Bank Negara. What is the usage of this data? Figure 2.6 shows five main usages of national production data.

Figure 2.6: National production data usage

2.8

EXERCISE 2.4

1. State the types of activities that are not included in the calculation of national production.

2. What is the difference between real GDP and nominal GDP?



Let us take a further look at these five main uses of national production data. (a) To Measure Economic Performance The economic growth rate can be calculated by comparing the current

national production data with that of the previous year. The information regarding the economic growth rate helps the government make comparisons with other countries.

(b) To Facilitate Policy-makers in Planning Policy-makers need the national production data to draft economic policies

for the coming years. The national production is an important guide that provides details about a countryÊs economic performance and therefore, is vital for planning purposes.

(c) To Show or Indicate the Success or Failure of Government Policies The government is able to evaluate the effectiveness of an economic policy

that has been implemented based on information about national production. It also allows the government to look at any economic problems that may have arisen, and find ways to solve these problems.

(d) To Measure the PeopleÊs Standard of Living The national production data is used to measure the standard of living of

citizens . Normally, the value of Real GNP or Real GDP per capita is used as a measuring yardstick. With this data, one can compare the peopleÊs standard of living from time to time or compare it with that of other countries.

(e) To Evaluate Contributions of Economic Sectors toward the CountryÊs

Economy Based on the production approach, the contributions made by each

economic sector towards the overall economic growth can be evaluated. The government can identify the sectors that are considered the backbone of the countryÊs economy. Based on each sectorÊs performance, the government can also assess the success or failure of its policies with regard to each sector.



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FACTORS AFFECTING NATIONAL PRODUCTION LEVEL

The national production level of a country fluctuates all the time. The national production of developed nations such as United States of America and Japan are higher compared with the national production of developing countries such as Sri Lanka and Thailand. There are two types of factors which can affect the national production level; internal and external.

2.9.1 Internal Factors

Among the internal factors that affect the level of national production are natural resources such as petroleum and gas. Countries that are rich in natural resources are bound to have a higher national production level compared to countries that have no natural resources.

Energy or labour factors play an important role in contributing towards national production. Countries that have hardworking and capable employees, for example, Japan, will definitely increase the national production level compared to nations with lazy and unproductive labourers.

Besides these, total capital owned by a country also affects the level of national production. Countries that have less capital cannot afford to produce large output compared to countries that have more capital.

The level of technology also determines the national production level. Countries that have knowledge and technological advancement are able to produce goods and services using faster and more efficient methods.

2.9.2 External Factors

Foreign investment plays an important role in increasing the national income and economic growth of a country. Foreign investment, whether direct or indirect, contributes towards a countryÊs economic growth and income level.

Did you know that terms of trade also affect the income of a country? What does this stand for?

„Terms of trade‰ refers to the ratio of the amount a country receives for its export commodity to the amount it pays for its import commodity.

2.9



Terms of trade are good if they show that a country is receiving a higher import quantity compared to its export quantity. This means it has to pay less for the products it imports, that is, it has to give up less exports for the imports it receives. Receiving assistance from other countries can also improve the recipient countryÊs standard of living. For example, assistance provided by international organisations and developed nations can help reduce the rate of poverty in poor countries. The national production of developing countries can be improved with the help of other countries.

PROBLEMS IN CALCULATING NATIONAL PRODUCTION

The calculation of national production is a very complicated process and many problems can arise during this process. Figure 2.7 shows you four problems that usually arise during the process of calculating national production.

2.10

EXERCISE 2.5

1. What are the uses of national production data? 2. Discuss factors that affect the income level of a country.

ACTIVITY 2.4

The process of calculating national production is not an easy one.Often, unforeseen problems arise and make matters more difficult.Before you start reading, try to identify problems that you usually readabout in the newspapers.



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Figure 2.7: Four problems in calculating national production

These four problems are further discussed as follows: (a) Gathering Information Gathering information or data is difficult as there are some parties, such as

small-time businessmen and farmers, who do not keep detailed records of their economic activities. The production values obtained from them are usually estimated figures. Mistakes happen when classifying this information, which could cause some confusion in the calculating process.

(b) Counting Twice/Double Counting The difficulty in distinguishing final goods from intermediate goods might

lead to the problem of double counting. A product can be classified as either a final or an intermediate good depending on its usage. For example, flour purchased by a housewife is considered a final product. However, flour purchased by a baker is considered an intermediate product.

(c) Determining the Prices of Goods Usually, prices of goods differ from one area to another. In addition, prices

of certain goods are always changing, for example, the price of palm oil, which changes everyday. Thus, the difficulty arises in determining the prices that should be taken into account in calculating national production.

(d) Devaluation (Depreciation) It is difficult to calculate devaluation because there are no detailed records

on it for some economic activities. Besides this, there are many different methods of calculating devaluation and each method gives a different figure.



BUSINESS CYCLE

Lastly, before we end this topic, let us learn about the business cycle for national production. Can you still remember the meaning of „business cycle‰, which you came across in the Topic 1?

Usually, a business cycle lasts for a period of between two and ten years, accompanied by expansion and contraction of various sectors in an economy. Let us look at Figure 2.8 which shows you a business cycle.

Figure 2.8: Business cycle

Based on Figure 2.8, you can see that there are five stages of the business cycle; peak, trough, recovery, growth (expansion) and recession (contraction). The points between the stages are indicated by peaks and troughs. The most important phases in a business cycle are growth (expansion) and recession (contraction). An economy is said to have achieved a full cycle when the economy has gone through the five stages. For example, a business cycle that starts at the peak is complete when it ends at the next peak.

Business cycle can be defined as a periodic fluctuation in the rate of economic activity, as measured by levels of employment, prices and production.

2.11

ACTIVITY 2.5

Based on your understanding of the problems that usually arise incalculating national production, identify if there are any problems that were not mentioned and list them down.



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Recession starts at the peak and ends at the trough. Recession occurs when the value of real national production drops for two quarters of a year in a row. The main characteristics of a recession include a decrease in demand for labour, and reduction in spending by consumers. Recession is also reflected in the drop in firmsÊ profits. Since consumer spending decreases during recession, all the firmsÊ unsold products increase and this will raise the firmsÊ inventories. Expansion, on the other hand, begins at the trough and ends at the peak. The early stage of expansion is called recovery. This happens when national production actually increases for six months continuously. A growth in the economy reflects the increase in business sector confidence, a hike in investment and a demand for labour. As income increases, peoplesÊ spending power increases too. FirmsÊ profits also will increase but inventories will be reduced.

This topic has discussed important economic variables, namely, topics related to national production. The circular flow of the income model is used to explain the relationship between income and expenditure.

There are three approaches for measuring Gross Domestic Product (GDP), namely, expenditure approach, production approach and income approach. Although these three approaches are different, they give the same GDP value. Besides that, the difference between the Real GDP and Nominal GDP has also been explained.

This topic has also discussed the use of national production data, factors that affect the national production level and problems faced in calculating national production. The topic ends with an explanation of the business cycle and its five phases.

EXERCISE 2.6

1. There are many problems that have to be dealt with in thecalculation of national production. Explain the usual problemsthat arise.

2. Define business cycle and discuss the five phases in a business

cycle.



Business cycle

Circular flow

Expenditure approach

Gross domestic product (GDP)

Gross national product (GNP)

National production

Nominal GDP

Problems

Production approach

Real GDP


national production

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