Gross National Product (GNP) Is the total market value of all-final goods and services produced annually in an economy.

Implicit in this definition is that we are measuring value in terms of current market prices. We refer to current-dollar GNP as nominal GNP, the total market value of allfinal goods and services produced annually in an economy, evaluated at current market prices. GNP is measured over a period of time. As such, it is a flow variable, as opposed to stock variable, which is measured at one specific point in time. Final Goods vs. Intermediate Goods

Why does GNP only measure final goods --goods sold to their ultimate users? Why not include intermediate goods --- goods that are input in the production of other goods --- as well?

Roger A. Arnold. Economics.

What GNP Omits 1. Nonmarket Goods and Services. Tasks which are performed without a market transaction, such as mowing your own lawn rather than hiring someone. 2. Illegal Goods and Services and Underground Activities. Illegal goods are not counted in GNP, because there is no record of them. Similarly, cash-only transactions, the breadand-butter of the underground economy, are not recorded; and while the government tries to estimate their value, they are not accurately counted in GNP. 3. Sales of Used Goods. GNP measures only current output. Goods produced last year although sold in the market this year are not included. 4. Financial Transactions and Transfer Payments. Transactions that involve trading existing assets, such as stock purchases and government transfer payments, are not included in GNP.

5. Leisure. Leisure is a good which is consumed by individuals just as cars, and housing are consumed. However, because leisure, in and of itself, is not purchased from anyone, it is not included in GNP. 6. Social Costs. GNP measures the market value of new production, but ignores any social costs (e.g. pollution) which may be associated with production.

Standard of Living While GNP measures the total value of final output, it tells us nothing about how that output is distributed. As such, it is a fairly poor measure of economic well being, or standard of living.

Ways of Measuring Gross National Product A. The Expenditure Approach. All final goods and services produced in the economy are bought by someone. Therefore, by summing the value of those expenditures, we may calculate the value of GNP. 1. Consumption ( C ) The total value of spending on consumer durable goods, nondurable goods, and services, by households. 2. Gross Private Domestic Investment ( I ) The sum of all purchases of newly produced capital goods (fixed investment) plus changes in business inventories (inventory investment). 3. Government Expenditures ( G ) The total amounts spent by local, state, and federal governments on final goods and services.

4. Net Exports ( X M ) Equal to exports ( X ) minus imports ( M ), this may have a positive, negative, or zero value. So, according approach: to the expenditure

GNP = C + I + G + (X-M)

B. Income Approach. All final goods and services are produced using factors of production, which are paid for their efforts. By summing the value of those factor payments, and adjusting them for indirect business taxes, the capital consumption allowance (depreciation), and a statistical discrepancy, we can find the value of GNP. 1. National Income (NI) The sum of all factor payments, specifically: compensation of employees plus proprietors income plus corporate profits plus rental income (of persons) plus net interest (interest earned minus interest paid). 2. Indirect Business Taxes (IBT) Include such taxes as sales taxes, excise taxes, and property taxes. They are part of national income because they are not considered to be payments to a factor of production, but they are part of total expenditures. 3. Capital Consumption Allowance (Depreciation) The value of capital goods used up in production.

So according to the income approach: GNP = National Income + Indirect Business Taxes + Capital Consumption Allowance + Statistical Discrepancy

C. Other National Income Accounting Measures Besides GNP and National Income, there are three other measures of particular note. 1. Net National Product (NNP) The value of gross national product minus the capital consumption allowance. 2. Personal Income (PI) The amount of income, earned and unearned, actually received by individuals; personal income equals national income plus government transfer payments minus undistributed profits minus social insurance taxes minus corporate income (profits) taxes.

3. Disposable Income (DI) The measure of an individuals actual spending power, equals personal income minus personal taxes.

REAL GNP Real GNP is GNP adjusted for changes in the price level that is GNP measured in constant price.