Beyond GDP: other ways to measure the economy

Posted 2023-03-03 19:43:30

10K

Key points

Gross national product, or GNP, includes what is produced domestically and what is produced by domestic labor and business abroad in a year.
National income includes all income earned: wages, profits, rent, and profit income.
Net national product, or NNP, is GNP minus depreciation.
Depreciation is the process by which capital ages over time and therefore loses its value.

Introduction

Gross domestic product, GDP, is one way of measuring the size of the economy—but it's not the only way. We can also measure the size of the economy by calculating gross national product, GNP, or net national product, NNP.

Gross national product

One of the closest cousins of GDP is gross national product. GDP includes only what is produced within a country’s borders. GNP adds what is produced by domestic businesses and labor abroad and subtracts out any payments sent home to other countries by foreign labor and businesses located in the United States.

Another way to think about is that GNP is based more on the production of citizens and firms of a country—wherever they are located—and GDP is based on what happens within the geographic boundaries of a certain country. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial.

Net national product

Net national product is calculated by taking GNP and then subtracting the value of how much physical capital is worn out—or reduced in value because of aging—over the course of a year. The process by which capital ages and loses value is called depreciation. The NNP can be further subdivided into national income, which includes all income to businesses and individuals and personal income, which includes only income to people.

For practical purposes, it is not vital to memorize these definitions. However, it is important to be aware that these differences exist and to know what statistic you are looking at, so that you do not accidentally compare, say, GDP in one year or for one country with GNP or NNP in another year or another country.

Calculating GDP, net exports, and NNP

Let's look at a problem together to see the differences between these different ways of measuring the economy.

Based on the information in the table below, what is the value of GDP? What is the value of net exports? What is the value of NNP?


Government purchases	$120 billion
Depreciation	$40 billion
Consumption	$400 billion
Business investment	$60 billion
Exports	$100 billion
Imports	$120 billion
Income receipts from rest of the world	$10 billion
Income payments to rest of the world	$8 billion

Step 1. To calculate GDP use the following formula, where consumption is start text, C, end text, investment is start text, I, end text, government is start text, G, end text, and exports are start text, X, end text, and imports are start text, M, end text: