BA Business Management

Economics

Assignment 2

(1)  Explain the meaning and the significance of the difference between the concepts of ‘money’ GDP (*1) and ‘real’ GDP (*2) as shown over these two decades of UK economic activity.  Make use of any graphs for these monetary indicators (in £billion) that you may have decided to prepare.

The word Gross domestic Product, also known as GDP, is defined as the market value of the final goods and services produced within a country in a year.  There are three methods of measuring the GDP:  The product method, which focus on the firms and their production, to sum up the value of all goods and services that they produced in the country.  The income method, which focus on the incomes that earned by those involved in the production process, those incomes are salaries and wages, rent, interest and profit.  The expenditure method, also known as the most common approach to measure the GDP, is to sum up the value of all the expenditure on the output.  The calculation is consumption (C) + Investment (I) + Government spending (G) and (Exports (X) – Imports (M)).  In addition, the three methods of measuring the GDP must carry out the same result, in other words, which means that the total value of the production, the total value of the incomes and the total value of the expenditure must be equal.  

There are two types of GDP, ‘money’ GDP and ‘real ‘GDP’.  ‘Money’ GDP, known as nominal GDP, measures the value of the output produced in a given year and valued at the price of that year.  ‘Real’ GDP measures the value of the output produced in a given year but valued at the price from the base year.  Here is an example, according to the data from the UK National Income Accounts, the ‘money’ GDP for UK was ₤953,227million in 2000 and ₤1,110,296 in 2003, as the ‘money’ GDP in 2003 was greater than in 2000, it indicates that either there were more output produced in 2003 than in 2000, or the price of the output in 2003 are higher than in 2000.  As the 2003 is the base year, the ‘Real’ GDP in 2003 must be the same as the ‘money’ GDP, which is ₤1,110,296.  However, the ‘real’ GDP in 2000 was ₤1,035,295, which means the same amount of output but using the price from 2003.  

In other words, when comparing the ‘real’ GDP from one year to another allows us to know the amount of outputs that the country has produced.  However, when comparing the ‘money’ GDP from one year to another does not allow us to know the amount of the outputs the country has produced, as the higher ‘money’ GDP might not reflect more production but only a higher prices.  

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The above graph shows the trends of the ‘money’ GDP and the ‘real’ GDP from 1992 to 2005, which the ‘real’ GDP is using 2003 as the based year.  The data shows that the ‘money’ GDP has a bigger increased rate than the ‘real’ GDP as the ‘money’ GDP the figures has doubled from 1992 to 2005, and the ‘real’ GDP has only increased 44%, from £806 billion in 1992 to £1,170 billion in 2005.  According to the table 1.1 from the UK National Income Accounts, the price level has increased 40 %, from 76% in 1992 to ...

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