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Measures of national income

Measures of national income are used in economics to estimate the value of goods and services in an economy. The most common measure of national income is Gross National Product (GNP); other measures include Gross Domestic Product (GDP) and Net National Product (NNP).

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Gross National Product

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

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. 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.

Goods and services produced ... in a year means that 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.

Goods and services produced by domestically owned factors of production means that the income is counted as part of GNP according to who owns the factors of production rather than where the production takes place. For example, consider 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): 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, so in the above example all of the income from the car factory would be counted as US GDP rather than German GDP.

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. This leads to the definition of Net National Product:

Net National Product (NNP) is defined as GNP minus Depreciation.

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. There is some justification for this in that countries with higher GNP often score highly on other measures of welfare such as life expectancy. However, there are serious limitations the usefulness of GNP as a measure of welfare. These include:

  • 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 for instance the Index of Sustainable Economic Welfare[?] (ISEW) have been suggested.

Sources of Economic Data



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