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 first developed during the 1940s. Some of the more common measures are Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI). Formerly in the Soviet Union and its satellite states COMECON, Net Material Product (NMI) was estimated (NNP-Services). In relation to greening the national accounts the United States Congressional Budget Office concludes "a gradual process of modifying measures of national economic performance is consistent with the history and development of the national accounts."^*

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).

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 discrepancy 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 a country's nationals (including profits from capital held abroad).

Final goods

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 goods. The same tires, if sold to a consumer, would be a final goods. 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 abroad 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 better when analysing sources and uses of income.

Gross Value Added

The Gross value added is:

GDP - taxes on products + subsidies on products = GVA
GVA + taxes on products - subsidies on products = GDP

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 but it includes transfer payments, and interest on the public debt
Personal Disposable Income (PDI) is PI minus personal taxes.

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 adjusted for inflation. For example, if both the "nominal GNP" and price level doubled between 1995 and 2005, the "real GNP" would remain the same. For year over year GNP growth, "real GNP" is usually used as it gives a more accurate view of the economy.

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.
GNP does not take into account many factors that may be important to quality of life, such as the quality of the environment (as distinct from the input value) and security from crime. This can lead to distortions - for example, spending on cleaning oil spill is included in GNP, but the negative impact of the spill on well-being (e.g. loss of clean beaches) are not taken into account.
GNP is the mean wealth rather than median wealth. Countries with a skewed income distribution may have a relatively high per-capita GNP while the majority of its citizens have a relatively low level of income, due to concentration of wealth in the hands of a small fraction of the population. See Gini coefficient.

Because of this, other measures of welfare such as the Human Development Index (HDI), Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI) and Sustainable National Income (SNI) have been suggested.

National accounting formulas (expenditure approach)

C = Personal consumption expenditures I = Gross private domestic investment G = Government consumption expenditures X = Gross exports of goods and services M = Gross imports of goods and services NR = Net income from assets abroad (net income receipts) CC = Consumption of fixed capital IBT = Indirect business taxes NDP = Net Domestic Product NI = National Income PI = Personal Income DI = Disposable income

Note: (X - M) is often written as "NX," which stands for "Net Exports"

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

The Flow of Income GDP - depreciation = NDP NDP - IBT + net foreign factor income = NI NI - corporate taxes - retained eranings - social security + transfer payments + net interest = PI PI - personal taxes = DI

United States income and output

To give an example of the components and their size. (^*)

**National income and output (Billions of dollars)**
Period Ending	2003
Gross national product	11,059.3
Net U.S. income receipts from rest of the world	55.2
U.S. income receipts	329.1
U.S. income payments	273.9
Gross domestic product	11,004.1
Private consumption of fixed capital	1,135.9
Government consumption of fixed capital	218.1
Statistical discrepancy	25.6
National Income	9,679.7

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