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Gross national income at market prices

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Measures of aggregate economic activity

Measures of aggregate activity are used to gauge the performance of an economy. These measures can be based on concepts of domestic production and domestic absorption—the extent to which goods and services are available for consumption, investment or government expenditures. The most commonly utilized measure of aggregate economic activity is gross domestic product (GDP).

GDP is a measure of aggregate economic activity associated with domestic production. It is at the core of Statistics Canada’s National Income and Expenditure Accounts and represents a measure of value added by economic agents1 through the production process. This value added generates income for workers and investors.

Gross domestic income (GDI) and gross national income (GNI) are measures of economic activity associated with domestic absorption. Rather than focussing only on domestic production, they also account for changes in international factor income payments (GNI) and changes in purchasing power (GDI and GNI). They, therefore, move to an income concept that accords with the goods and services an economy can use for consumption and investment, rather than the goods and services an economy produces.

In a world with no international transactions, GDP, GDI and GNI are equal. However, when a country transacts with other nations, international financial obligations and changes in international relative prices can lead to divergences between what is produced (GDP) and what can be used by the domestic economy.

From gross domestic product to gross domestic income

GDP and GDI capture, in succinct form, the myriad of events that affect the domestic income that the economy creates as it transforms labour and capital into output (GDP), and then into consumption and investment (GDI). As such, they provide a useful summary of how changes in inputs and prices translate into changes in goods and services available to consumers and firms.

Although GDP is central to the National Income and Expenditure Accounts, National Accounts data can also be used to evaluate GDI. In current dollar terms GDP and GDI are always equal—income earned always equals the value of purchases from that income. However, in terms of the volume of GDP (real GDP) created, and the volume of goods and services consumed or invested, the equality does not hold in an economy that engages in international trade.

When an economy trades extensively, it is possible that changes in real GDP lag behind changes in consumption and investment when favourable price changes occur (export prices increase relative to import prices), or vice versa when unfavourable price changes occur. The difference stems from a ‘trading gain’ that accrues to real GDI, but not real GDP.

The trading gain

Real GDP is, at its core, a measure of production. However, the real income derived from production also depends on the external trade the country engages in. When the price a of country’s exports rises faster than the price of its imports, the volume of goods the country can purchase with its current stream of exports changes for two reasons.

First, the country’s terms of trade rise. The terms of trade is the ratio of export prices to import prices and represents the rate at which exports are traded for imports. As the terms of trade rise, each export purchases more imports, raising real domestic incomes. An opposite effect occurs when a country’s terms of trade fall.

Second, there is a change in the country’s real exchange rate. The real exchange rate, as measured here, is the difference between domestic prices and international prices. If international goods become cheaper, say as import prices fall in response to a nominal exchange rate appreciation, then the cost of importing declines, increasing the volume of goods and services that may be purchased by the domestic economy.

Movements in the terms of trade and the real exchange rate are not independent of each other – for example, a depreciation of the nominal exchange rate can worsen a country’s terms of trade and simultaneously improve its real exchange rate. They can reinforce or dampen each other’s effects depending on the type of price movements, and their sources.

From real gross domestic income to real gross national income

The final adjustment relates to international income remuneration. Real GDI is a statistic concerned with assessing the purchasing power of income created in Canada while real GNI assesses the purchasing power of income that accrues to economic agents who reside in Canada2. A difference arises between real GDI and real GNI when Canadian-resident economic agents invest or work abroad, or when non-resident economic agents invest or work in Canada. The wages and salaries paid to cross-border employees, or the dividends and interest payments made to cross-border investors, lead to a flow of income across jurisdictions that enhance or detract from real income growth3.

The transfer of factor incomes between residents and non-residents that results, which is essentially a claim on their respective GDPs, raises or lowers real GNI depending on whether the net flow of these international payments is into or out of Canada.

1. Economic agents include individuals, businesses, governments, and non-profit institutions which are not charging market prices nor funded by government.

2. In national accounting, the country of residence of an economic agent is typically the country where the economic agent is located. A corporation is considered to reside in the country in which it is legally incorporated, even if it is wholly owned by foreign investors. An individual is typically considered to be a resident of a country if he/she has maintained his/her principal dwelling in that country for at least one year, or intends to stay in that country for at least one year. There are some exceptions, most notably for students who study abroad with the intention of returning to their home country after their studies are completed. In national accounting, neither citizenship nor plans to move to another country in the future have any bearing on an individual’s country of residence.

3. The Canadian System of National Accounts does not contain a breakout for estimates of compensation of cross-border employees. Therefore, in the Canadian GNI, only international investment income flows are included in the flows of international income remuneration.