National Income and Economic Indicators

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National Income and Economic Indicators — Key Facts for Sri Lanka A/L Examination

Key Concepts:

• GDP (Gross Domestic Product): Total value of all final goods and services produced within a country in a given period
• GNP (Gross National Product): GDP + net factor income from abroad
• National Income: Total income earned by a nation’s residents
• Per Capita Income: National income ÷ population

Three Approaches to Calculating GDP:

1. Output/Production Approach: Sum of value added at each stage
2. Income Approach: Sum of all incomes (wages, rent, interest, profit)
3. Expenditure Approach: Sum of all spending (C + I + G + X - M)

⚡ A/L Exam Tip: GDP = National Income (at factor cost) = Expenditure on Final Goods and Services. These three should equal!

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🟡 Standard — Regular Study (2d–2mo)

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National Income and Economic Indicators — Detailed Study Guide

Gross Domestic Product (GDP)

Defining GDP:

Criterion	Explanation
Final goods and services only	Avoids double counting
Within a country’s borders	Geographic basis for GDP
In a given time period	Usually one year
Market value	Prices as measurement unit

GDP vs. GNP:

GDP = Market value of all final goods and services produced 
      within the country
      
GNP = GDP + Net Factor Income from Abroad
    = GDP + (Income from abroad - Income to abroad)

Why Factor Income is Added/Subtracted:

• Sri Lankan company earning profit from factory in India → added to GNP
• Foreign company earning profit in Sri Lanka → subtracted from GNP
• GNP measures income of NATIONAL residents wherever located
• GDP measures income WITHIN the country’s borders

GDP at Market Price vs. Factor Cost:

Concept	Definition	Calculation
GDP at market price	Market value including indirect taxes	—
Less: Indirect taxes	GST, VAT, excise duties	Subtract
Plus: Subsidies	Government grants to producers	Add
GDP at factor cost	True cost of production	= GDP at MP - Indirect taxes + Subsidies
NNP at factor cost	Net value added after depreciation	= GDP at factor cost - Depreciation
National Income	Total income of residents	= NNP at factor cost

Three Methods of GDP Calculation

1. Production/Output Approach:

GDP = Sum of Gross Value Added by all enterprises
    + Indirect taxes - Subsidies
    - Depreciation

Value Added Method:

• Each firm adds value at its stage of production
• Value added = Value of output - Value of intermediate inputs
• Sum of all value added = GDP

Example - Rice Production Chain:

Stage	Revenue	Intermediate Input	Value Added
Paddy farmer	50	0	50
Rice miller	120	50	70
Wholesaler	150	120	30
Retailer	180	150	30
Total			180

GDP = Rs. 180 (final market value)

2. Income Approach:

GDP = Wages and salaries (compensation of employees)
    + Rent (Rental income)
    + Interest (Net interest)
    + Profit (Corporate + Unincorporated)
    + Mixed income (Self-employed)
    + Depreciation
    + Indirect taxes - Subsidies

Factor Incomes:

Factor	Payment	Example
Labour	Wages, salaries, bonuses	Teacher’s salary
Land	Rent, lease payments	Monthly rent
Capital	Interest	Bank interest earned
Entrepreneurship	Profit	Business owner’s profit
Management	Profit/salary	Manager’s compensation

3. Expenditure Approach:

GDP = Consumer Expenditure (C)
    + Investment (I)
    + Government Expenditure (G)
    + Exports (X)
    - Imports (M)

GDP = C + I + G + X - M

Components Explained:

Symbol	Component	Sri Lankan Examples
C	Household consumption	Food, clothing, transport, education
I	Gross Fixed Capital Formation	New machinery, buildings, roads
I	Changes in inventories	Unsold goods, raw materials
G	Government expenditure	Salaries, public services, defence
X	Exports	Tea, garments, spices
M	Imports	Fuel, vehicles, machinery

⚡ Common A/L Mistake: Don’t confuse GDP (total within borders) with GNP (income of nationals). Remember: GNP = GDP + Net Factor Income from Abroad!

National Income Aggregates

Key Aggregates:

Aggregate	Symbol	Definition
Gross Domestic Product	GDP	Total output within country
Gross National Product	GNP	GDP + Net factor income from abroad
Net National Product	NNP	GNP - Depreciation
National Income	NI	NNP at factor cost
Personal Income	PI	NI - Corporate profits - Social security + Transfer payments
Disposable Income	DI	PI - Direct taxes

Depreciation (Capital Consumption Allowance):

• Physical capital wears out over time
• Value lost due to wear and tear
• NNP = GNP - Depreciation (true net output)
• Allows for capital replacement

Relationship Between Aggregates:

GDP (at market prices)
- Indirect taxes + Subsidies
= GDP (at factor cost)
- Depreciation
= NNP (at factor cost) = National Income
+ Net factor income from abroad
= GNP (at factor cost)

Economic Indicators

Leading Indicators (predict future):

• Stock market performance
• Consumer confidence index
• Building permits
• Money supply (M2)
• Average work week length

Coincident Indicators (occur with economic activity):

• GDP itself
• Employment levels
• Industrial production

Lagging Indicators (change after economy):

• Unemployment rate (lags GDP)
• Consumer Price Index (CPI)
• Interest rates
• Corporate profits

GDP Growth Rate:

• Annual percentage change in GDP
• Positive growth = economic expansion
• Negative growth = recession
• Sri Lanka target: Sustainable 6-8% annual growth

Sri Lanka’s GDP Context (2023-2024):

• Recovery from 2022 economic crisis
• IMF program implemented
• Growth turning positive after contraction
• Debt restructuring ongoing

Standard of Living and Quality of Life

Limitations of GDP as Measure of Welfare:

GDP Limitation	Explanation
Non-market transactions	Unpaid housework, volunteer work not counted
Underground economy	Black market, unreported income
Environmental damage	Pollution increases GDP but reduces welfare
Quality of products	Doesn’t measure quality improvements
Distribution	GDP tells nothing about inequality
Leisure time	More goods but longer hours = lower welfare
Health and life expectancy	Not directly measured
Crime and social problems	Doesn’t capture

Human Development Index (HDI):

• Combines three dimensions:
  1. Health: Life expectancy at birth
  2. Education: Mean years of schooling, expected years of schooling
  3. Standard of living: GNI per capita (PPP)

Sri Lanka’s HDI (2023 estimates):

• High human development category
• Life expectancy: ~77 years
• Expected schooling: ~14 years
• GNI per capita (PPP): ~13,000+ international dollars
• Gender Inequality Index: Moderate improvement

Other Welfare Measures:

Genuine Progress Indicator (GPI):

• GDP minus environmental and social costs
• Adds value of unpaid work
• Subtracts crime, pollution, family stress

Human Capital Index:

• Measures skills and knowledge people possess
• Important for long-term productivity

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

National Income and Economic Indicators — Complete Notes for A/L Sri Lanka

Per Capita Income and Comparison

Per Capita Income Calculation:

Per Capita Income = National Income / Population

Sri Lanka Per Capita Income (historical):

Year	GDP per capita (current USD)	Context
2010	~2,800	Post-war reconstruction
2015	~3,800	Steady growth
2019	~4,000+	Upper middle income status
2022	~3,500	Economic crisis
2023	~3,400	Crisis and recovery

Comparing Nations:

Currency Exchange Rate Method:

• Convert all currencies to common currency (USD)
• Problem: Doesn’t reflect purchasing power
• Example: Rs. 400 in Sri Lanka buys more than $1 in USA

Purchasing Power Parity (PPP) Method:

• Adjusts for price differences between countries
• A basket of goods costs same in all countries (in theory)
• Better for comparing living standards
• Sri Lanka PPP per capita: ~13,000+ international dollars

Income Classification:

Category	GNI per capita (USD, 2023)
Low income	< 1,045
Lower middle income	1,045 - 4,695
Upper middle income	4,695 - 14,695
High income	> 14,695

Sri Lanka is currently classified as lower-middle income (near upper boundary)

GDP Deflator and Inflation

GDP Deflator:

• Measure of price level of all domestically produced goods
• Nominal GDP ÷ Real GDP × 100
• Also called GDP Price Index

Nominal GDP vs. Real GDP:

Type	Calculation	What it measures
Nominal GDP	Uses current prices	Current market value
Real GDP	Uses base year prices	Actual quantity change

Formula:

Real GDP = Nominal GDP / GDP Deflator × 100

Or:

GDP Deflator = (Nominal GDP / Real GDP) × 100

Example:

• Base year (2015): 1 kg tea = Rs. 500

• Current year: 1 kg tea = Rs. 700

• Tea production: 100 kg in both years

• Nominal GDP (current year): 100 × Rs. 700 = Rs. 70,000

• Real GDP (at base year prices): 100 × Rs. 500 = Rs. 50,000

• GDP Deflator: (70,000 / 50,000) × 100 = 140

• Inflation implied: 40%

Inflation and Price Indices

Consumer Price Index (CPI):

• Measures cost of a basket of goods consumed by typical household
• Fixed basket (food, clothing, housing, transport, etc.)
• Sri Lanka’s CPI: Department of Census and Statistics calculates

CPI Calculation:

CPI = (Cost of basket in current year / Cost of basket in base year) × 100

CPI vs. GDP Deflator:

Feature	CPI	GDP Deflator
Basket	Fixed consumer basket	All domestically produced goods
Imports	Includes imports	Excludes imports
Who it measures	Household consumers	All producers
Weights	Fixed	Changes with production patterns

Types of Inflation:

Type	Definition	Sri Lankan Example
Creeping inflation	1-3% annually	Ideal target
Galloping inflation	10-100%	Sri Lanka 2022 (50%+)
Hyperinflation	>1000%	Zimbabwe
Stagflation	Inflation + stagnation	Simultaneous inflation and recession

Causes of Inflation:

Demand-Pull Inflation:

• Too much money chasing too few goods
• Aggregate demand > Aggregate supply
• “Too much spending”

Cost-Push Inflation:

• Rising costs force prices up
• Supply shocks (oil, food)
• “Too expensive to produce”

Sri Lanka 2022 Inflation:

• Multiple causes combined
• Money supply increase
• Fertiliser crisis affecting food supply
• Global commodity price rises (fuel)
• Exchange rate depreciation
• Reached 50%+ annually

Economic Growth

Economic Growth Definition:

• Increase in real GDP over time
• Usually measured as annual percentage change
• Sustained growth lifts living standards

Growth vs. Development:

Concept	Focus	Measurement
Economic Growth	Increase in output	GDP, GNP
Economic Development	Improvement in welfare	HDI, poverty, inequality

Sources of Economic Growth:

Extensive Factors (More inputs):

• Population growth → more labour
• Capital accumulation → more machinery
• Land expansion → more resources

Intensive Factors (Better use):

• Technological progress
• Human capital improvement (education, skills)
• Better institutions and governance
• Innovation and entrepreneurship
• Efficiency improvements

Growth Accounting Equation:

Growth of Output = Weighted average of:
                  + Growth of Labour
                  + Growth of Capital
                  + Growth of Total Factor Productivity

Sri Lanka’s Growth Challenges:

• Productivity growth relatively low
• Capital accumulation constrained by debt
• Skills mismatch in labour market
• Need to move to higher value-added activities
• Export diversification needed

Solow Growth Model Basics:

• Capital accumulation alone can’t explain long-term growth
• Technological progress drives sustained growth
• Diminishing returns to capital
• Convergence hypothesis: Poorer countries grow faster

Sri Lanka’s National Income Accounts

Sri Lanka’s GDP Structure (2022-2023):

Sector	Approximate Share	Examples
Agriculture	10-12%	Tea, rice, fisheries, rubber
Industry	25-30%	Manufacturing, construction, mining
Services	55-60%	Tourism, finance, transport

Sectoral Contribution Trends:

• Agriculture share declining (structural transformation)
• Industry share stagnant
• Services share increasing (modern services growth)

Expenditure Composition:

• Private consumption (C): Largest share ~55-65%
• Government consumption (G): ~10-15%
• Investment (I): ~25-30%
• Net exports (X-M): Usually negative (imports > exports)

Central Bank Data Sources:

• Quarterly GDP estimates
• Annual national accounts
• Sri Lanka’s national income methodology follows UN System of National Accounts (SNA 2008)

Limitations of Sri Lanka’s Data:

• Large informal/undeclared economy
• Underreporting in services
• Underdeveloped statistical infrastructure
• Regional disaggregation limited

⚡ A/L Exam Tip: Questions often ask you to compare GDP under different methods, identify which approach is being used, or calculate GDP from given data. Know all three approaches and their components!

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