Measures of national income and output

Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. They use a system of national accounts or national accounting developed by Simon Kuznets in the 1960s. Some of the more common measures are Gross National Product (GNP), Gross Domestic Product (GDP), Net National Product (NNP), and Net National Income (NNI).

There are at least two or three different ways of calculating these numbers. The expenditure approach determines aggregate demand, or Gross National Expenditure, by summing consumption, investment, government expenditure and net exports. On the other hand, the income approach and the closely related output approach can be seen as the summation of consumption, savings and taxation. The three methods must yield the same results because the total expenditures on goods and services (GNE) must by definition be equal to the value of the goods and services produced (GNP) which must be equal to the total income paid to the factors that produced these goods and services (GNI). (GNP=GNI=GNE by definition)

In actual fact, there will be minor differences in the results obtained from the various methods due to changes in inventory levels. This is because goods in inventory have been produced (and therefore included in GDP), but not yet sold (and therefore not yet included in GNE). Similar timing issues can also cause a slight descrepency between the value of goods produced (GDP) and the payments to the factors that produced the goods (particularly if inputs are purchased on credit).

Gross National Product

Gross National Product (GNP) is the total value of final goods and services produced in a year by domestically owned factors of production.

Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good. The same tires, if sold to a consumer, would be a final good. Only final goods are included when measuring national income. If intermediate goods were included too, this would lead to double counting; for example, the value of the tires would be counted once when they are sold to the car manufacturer, and again when the car is sold to the consumer.

Only newly produced goods are counted. Transactions in existing goods, such as second-hand cars, are not included, as these do not involve the production of new goods.

Income is counted as part of GNP according to who owns the factors of production rather than where the production takes place. For example, in the case of a German-owned car factory operating in the US, the profits from the factory would be counted as part of German GNP rather than US GNP because the capital used in production (the factory, machinery, etc.) is German owned. The wages of the American workers would be part of US GNP, while the wages of any German workers on the site would be part of German GNP.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of final goods and services produced within a country's borders in a year.

GDP counts income according to where it is earned rather than who owns the factors of production. In the above example, all of the income from the car factory would be counted as US GDP rather than German GDP.

To convert from GNP to GDP you must subtract factor income receipts from foreigners that correspond to goods and services produced abroard using factor inputs supplied by domestic sources. To convert from GDP to GNP you must add factor input payments to foreigners that correspond to goods and services produced in the domestic country using the factor inputs supplied by foreigners.

GDP is a better measure of the state of production in the short term. GNP is a better when analysing sources and uses of income.

Depreciation and Net National Product

Not all of GNP is available to produce final goods and services - part of it represents output that is set aside to maintain the nation's productive capacity. Capital goods, such as buildings and machinery, lose value over time due to wear and tear and obsolescence. Depreciation measures the amount of GNP that must be spent on new capital goods to offset this effect.

In the Income Approach:

• Net National Product (NNP) is GNP minus depreciation
• Net National Income (NNI) is NNP minus indirect taxes
• Personal Income (PI) is NNI minus retained earnings, corporate taxes, transfer payments, and interest on the public debt
• Personal Disposable Income (PDI) is PI minus personal taxes, plus transfer payments.

In summary:

S = personal savings
C = personal consumption
PDI = personal disposable income
T_P = personal taxes paid
TP_P = personal transfer payments received from governments
PI = personal income
RE = retained earnings
T_C = corporate taxes
TP_C = corporate transfer payments from governments
I_G = interest on the public debt
NNI = net national income
T_IN = indirect taxes
NNP = net national product
D = depreciation
GNP = gross national product

S + C = PDI

S + C + T_P - TP_P = PI

S + C + T_P - TP_P + RE + T_C - TP_C - I_G = NNI

S + C + T_P - TP_P + RE + T_C - TP_C - I_G + T_IN = NNP

S + C + T_P - TP_P + RE + T_C - TP_C - I_G + T_IN + D = GNP

Real and nominal values

Nominal GNP measures the value of output during a given year using the prices prevailing during that year. Over time, the general level of prices rise due to inflation, leading to an increase in nominal GNP even if the volume of goods and services produced is unchanged.

Real GNP measures the value of output in two or more different years by valuing the goods and services produced at the same prices. For example, GNP might be calculated for 2000, 2001 and 2002 using the prices prevailing in 2002 for all of the calculations. This gives a measure of national income which is not distorted by inflation.

National income and welfare

GNP per person is often used as a measure of people's welfare. Countries with higher GNP often score highly on other measures of welfare, such as life expectancy. However, there are serious limitations to the usefulness of GNP as a measure of welfare:

• Measures of GNP typically exclude unpaid economic activity, most importantly domestic work such as childcare. This can lead to distortions; for example, a paid childminder's income will contribute to GNP, whereas an unpaid mother's time spent caring for her children will not, even though they are both carrying out the same economic activity.

• GNP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GNP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time. Similarly, the impact of economic activity on the environment is not directly taken into account in calculating GNP.

• Comparison of GNP from one country to another may be distorted by movements in exchange rates. Measuring national income at purchasing power parity can help to overcome this problem.

Because of this, other measures of welfare such as the Index of Sustainable Economic Welfare (ISEW) and Genuine Progress Indicator have been suggested.

National Accounting Formulas (Expenditure approach)

 C = Personal consumption expenditures
 I = Gross private domestic investment
 G = Government consumption expenditures
 X = Net exports of goods and services
 M = Net imports of goods and services
 NR = Net income from assets abroad
 CC = Consumption of fixed capital
 IBT = Indirect business taxes

 GDP = C + I + G + (X - M)
 GNP = C + I + G + (X - M) + NR
 NI  = C + I + G + (X - M) + NR - CC - IBT

Alternate economic measures

• Gross Happiness Index
• Genuine Progress Index
• Human Development Index

Sources of economic data

• US Bureau of Economic Analysis

External links

• Understanding GNP and GDP (source: BBC)