Various Measures for Calculating Income and Product & GNP

Various Measures for Calculating Income and Product 

Gross National Product (GNP) is another important measure to understand wealth creation within an economy. GNP includes GDP minus net factor payments abroad. GNP is close to gross national income less statistical discrepancy. Gross National Income is equal to GDP minus statistical discrepancy. GNP is important with respect to the US as it was the featured measure of production until 1991. Gross domestic purchases are market value of goods and services purchased by resident of a country, includes goods and services produced outside the country. This is similar to GDP minus net exports.

Image : The middle Road Source: NIPA; U.S Bureau of Economic Analysis  Above relationship between major NIPA measures of income and product. Does not include NDP, NDI, NNP from the original figure. GDI = Gross Domestic Income; GNI= Gross National Income; NDI = Net Domestic Income; NNP = Net national product; NI = National Income

Gross Domestic Purchases = Personal Consumption Expenditures (PCE) + Gross Private Domestic Investment (GPDI), + Government Purchases (GP)

Understanding Government Purchases 

Government Purchases in NIPA are categorized as Government Consumption Expenditure and Gross Investment. Here it’s imperative to understand the General Government term that is widely used around the world. The government produces market and non-market output. Usually, the government output is in the public domain example public education, libraries. These services are free or at a minimal cost, termed non market and classified under General Government. However, the government also provides goods and services through government enterprises to households and businesses usually at a market-driven price to recover full or part of the operational cost. Examples of government enterprises in the US include Postal Service and Government National Mortgage Association or Ginnie Mae.

Fig 1. Government Consumption Expenditure and Gross Investment and Government Gross Output example 2012 NIPA Handbook 

Government Enterprises usually work to remove any monopiles or because the service is highly beneficial to the society. If the social benefit is greater than social costs generating positive externalities, these products or services must be highly subsidised. The value added by government enterprises is recorded into business sector along with that of private businesses (NIPA Handbook).

Gross Investment is government spending on fixed assets example structures like highways, schools, defense equipment and research & development classified under intellectual property products. Value added is calculated at input costs example raw material, labor, supplies, etc. Since these services are for the public good the net return on fixed capital is zero. The consumption of fixed capital is a depreciation measure to account for a partial annual service produced by the existing stock of government fixed capital.    

Source: OECD (2022), General government spending (indicator). doi: 10.1787/a31cbf4d-en (Accessed on 23 April 2022). This indicator is measured in terms of thousand USD per capita, and as percentage of GDP. All OECD countries compile their data according to the 2008 System of National Accounts (SNA).

Gross National Product can be calculated from the above equation by removing goods and services produced outside the US from the three components plus net exports. Net Exports = Exports – Imports.

GNP= GDP + Factor Payments from Abroad – Factor Payments to Abroad

Video discussion on GNP | The middle Road 

The following question is covered in the video. American company opens a plant in Ghana. It earned $1M in Ghana in 2019. Its profit was $100,000.  Has the GDP of US increased or of Ghana ? Whose GNP has increased?

The graph below, a comparison between Nominal and Real GDP and GNP. Note real GDP is inflation-adjusted GDP with 2012 as the base year. Chained-dollar values quoted are always with a base year. In the US as of 2022, Real GDP (chained dollar value) is calculated by multiplying the quantity index by the current dollar value in the reference year (2012) and then dividing by 100. Note for the comparison, Annual, Seasonally Adjusted Annual Rate. Real GDP is chained at 2012 dollars. Real GDP in the US grew by 5.7 percent in 2021 over 2020 compared to the -3.4 percent growth in 2020. Compare this with current prices GDP growth. In 2021 the annualized growth was 10 percent 2021 compared to the 2.2 percent drop in 2020. This figure helps in understanding the impact of inflation on growth in gross domestic purchases. NIPA and globally, percent change in real GDP is used to measure the change in the total income generated within an economy.  For the US, in 2021 Real GDP was $19.23 trillion, GNP $23.25 trillion and GDP at current prices ~$23 trillion. Remember GDP at current prices can be divided by implicit price deflator to arrive at Real GDP. 

Source: U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, April 22, 2022. U.S. Bureau of Economic Analysis, Gross National Product [GNP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GNP, April 22, 2022. U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, April 22, 2022. Fig. in billion dollars. 

Gross National Income

Data Source: OECD (2022), Gross national income (indicator). doi: 10.1787/8a36773a-en (Accessed on 22 April 2022). The measure is in US dollar prices in current PPPs i.e. purchasing power parity.   | Graph : The middle Road