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## Macroeconomics

### Unit 2: Lesson 2

Limitations of GDP

# Beyond GDP: other ways to measure the economy

Read about gross national product (GNP), national income, and net national product (NNP).

## 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:
\begin{aligned}\text{GDP} &= \text{C + I + G + (X - M)}\\\\ &= \400 + \60 + \120 + (\100-\120)\\\\ & = \560 \text{ billion}\end{aligned}
Step 2. To calculate net exports, subtract imports from exports.
\begin{aligned}\text{Net exports} &= \text{(X - M)}\\\\ & = \100 - \120\\\\ &= -\20 \text{ billion}\end{aligned}
Step 3. To calculate NNP, use the following formula:
\begin{aligned}\text{NNP} &= \text{GDP} + \text{IncomeReceipts} - \text{IncomePayments} - \text{Depreciation}\\\\ &= \560 + \10 - \8 - \40\\\\ & = \522 \text{ billion}\end{aligned}

## Want to join the conversation?

• Under Key Points NNP is explained as "Net national product, or NNP, is GDP minus depreciation." Whereas under Introduction, sub heading Net national product it is defined as "Net national product is calculated by taking GNP and then subtracting the value of how much physical capital is worn out". Which is the correct one?
• depreciation is basically a fancy word for "value of how much physical capital is worn out", meaning that all assets lose value over time.
Imagine you are buying a machine for your company in 2016 worth \$100 000. A year later it will be worth less. This process of losing value, or as put before: physical capital worn out, is depreciation
• In the Net National product section it is mentioned that '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.'. What is the difference of national income and personal income? Is there a difference between income to individuals and income to people? Are they mutually exclusive sets or is personal income a subset of national income?
• Personal income is a subset of national income. Often businesses, whose income is included in national income but not in personal income, will reinvest their profits rather than turning the profits over to the owners of the business. That makes personal income slightly less than national income.
• in the Key points, second paragraph, said"Net national product, or NNP, is GDP minus depreciation.", But in the ending"Calculating GDP, net exports, and NNP", Step 3, said NNP=GDP+IncomeReceipts−IncomePayments−Depreciation, which one is right?
(1 vote)
• They have now fixed it, it says NNP = GNP-depreciation.
• In Gross National Product, I didn't quite understand the part- "subtracts out any payments sent home to other countries by foreign labor and businesses located in the United States". Can someone help me understand this?
• GRAMMATICALLY it's just about Foreign nationals who work in the US and send home their money; the amount they send home is subtracted.

BY THE DEFINITION however, it appears that whatever is paid to foreign nationals working in the US is subtracted regardless of whether sent home or not, because a US national abroad has his production added to US GNP and there's no talk about whether he sends money back :
"Gross national product, or GNP, includes what is produced domestically and what is produced by domestic labor and business abroad in a year."

If the distinction between the definition and the actual sentence you quoted is what you don't quite understand in that you want to know which one is actually accurate, then ... yeah I also am not 100% certain myself and so I cannot help you with that.
(1 vote)
• Hey i am really confused about this NNP, i have heard it is GNP - Income tax + Subsidies.
Clarification appreciated
(1 vote)
• From the reading:
"NNP=GDP+IncomeReceipts−IncomePayments−Deprectiation [sic]"

(yes depreciation was spelled wrong in the reading)

"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."

From my understanding, this is the GNP with depreciation. You are effectively trying to factor in the depreciation of the assets in the GNP over their collective lifetimes.