Alternative Ways to Measure the Economy
Gross National Product
While GDP represents the most commonly used measure of an economy’s output, economists sometimes use an alternative measure. Gross National Product (GNP) is the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country.
The difference between GDP and GNP is a subtle one. The GDP of a country equals the value of final output produced within the borders of that country; the GNP of a country equals the value of final output produced using factors owned by residents of the country. Most production in a country employs factors of production owned by residents of that country, so the two measures overlap. Differences between the two measures emerge when production in one country employs factors of production owned by residents of other countries.
Suppose, for example, that a resident of Bellingham, Washington, owns and operates a watch repair shop across the Canadian–U.S. border in Victoria, British Columbia. The value of watch repair services produced at the shop would be counted as part of Canada’s GDP because they are produced in Canada. That value would not, however, be part of U.S. GDP. But, because the watch repair services were produced using capital and labor provided by a resident of the United States, they would be counted as part of GNP in the United States and not as part of GNP in Canada.
Because most production fits in both a country’s GDP as well as its GNP, there is seldom much difference between the two measures. The relationship between GDP and GNP is given by
Equation 6.3
GDP + net income received from abroad by residents of a nation = GNP
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. In other words, 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 (NNP) 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.
To get an idea of how these calculations work, follow the steps in the following feature.
CALCULATING GDP, NET EXPORTS, AND NNP
Based on the information in 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:
Step 2. To calculate net exports, subtract imports from exports.
Step 3. To calculate NNP, use the following formula:
