ECONOMICS

Economics

Economics

Just as an individual person can live on both the salaries earned currently and interest earned from his bank deposits, an economy apart from its income from current production can also have income from its investment in the "Rest of the World". GDP, from the income angle, represents current income generated by production within an economy. Adding to GDP the income earned by residents of the economy from the Rest of the World, and deducting income earned by non-residents within the economy, gives the Gross National Product (GNP).

GNP is a measure of the total income earned by the residents of a country or economy from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside. As mentioned in the previous paragraph, GNP for a country or territory is estimated by:

GNP = GDP

+ Factor income earned by residents from the rest of the world

- Factor income earned by non-residents from within the economy

Factor income includes direct investment income, portfolio investment income, other investment income (e.g. interest income) and compensation of employees. (Bergsten, 175-189)

Real Exchange Rates

A consideration when looking at "value" is determining what the dollar will really buy. Here the answer depends partially on inflation rates in the trading countries. Economists take account of different inflation rates between trading partners by calculating real exchange rates. Real exchange rates depend on two factors--the change in the market value of a currency and the difference in inflation rates between trading partners. (Ahearne,313-336) Consider a 2-percent change in the real agricultural market value of the dollar. That change is made up of nominal changes in exchange rates times differences in inflation rates between the United States and the basket of foreign agricultural markets weighted by the relative value of their ...