Understanding GDP, GNP, and National Accounts
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the total production of final goods and services made by the factors of production located within a country in a given period. Output is defined as the sum of all final goods and services, since they do not take intermediate goods into account or the process that has been used to produce them, thus avoiding double counting. Investments in capital assets are considered in the GDP as final goods, even though they are used as inputs, they are not resold or subsequently processed.
Internal means whoever takes place within the borders of the country without taking into account the origin of the factors, i.e., whether they are domestically owned.
Gross means the total final goods and services with no deduction for depreciation on capital.
Gross National Product (GNP)
Gross National Product (GNP) is the result of everything produced in one year by domestic production factors, regardless of whether these factors are located inside or outside the borders of the country concerned. It includes the calculation of the Gross Investment (the value of new purchases of the company).
Net National Product (NNP) is GNP minus depreciation of capital during the year under review. This means that the NNP includes net investment (the value of new purchases less redemptions).
Nominal Domestic Product
Nominal Domestic Product is the value of production according to the prices of the period in which goods were produced. In other words, production is measured at a given time, in current pesos, without removing the effects of price growth.
Real National Product
Real National Product is the value of production considered in relation to the prices of a fixed basket of goods in a base year. Thus, the values are not increased by inflation.
For this, a general change in prices is established, because not all prices vary similarly. This variation is called the “Price Index”. Price indexes are weighted averages of each period.
Magnitudes Not Counted in GDP
The GDP does not include certain goods and services generated within the country, among which we can mention:
- Those goods and services produced that are not sold in any market. Example: field products for own consumption.
- The value of final goods and services of illegal or criminal nature, such as drugs.
- Those that have not been registered in legal accounting or tax records, even though the exchange for cash has been made. This is typical of the black economy.
- Sales of second-hand goods or used goods, even if they are new, if they have been produced in previous periods. However, the trade commission of the transaction is included if it was made during the period.
- The nominal value of financial transactions during the year (loans contracted).
- The volume of social costs: The expenses incurred to prevent environmental pollution involve an overestimation of the final output. However, the value of pollution control production is computed.
National Accounts
National Accounts are the registration of the circulation of a country’s overall economic activity generated by the three fundamental economic units: consumers, businesses, and government. The accounts have been eliminated in the study of the outcome of the transactions between the various sectors that perform economic activity in the country. They measure, then, the quantitative evolution of major economic aggregates. The overall participation of all sectors mentioned forms the Gross Domestic Product (GDP).
National Income or Product
National Income or Product is the total output of final goods and services (excluding intermediate goods and services) made by the production factors of an economy in a period, usually one year.
Looking at the definition:
We talk about the sum of all final goods and services (those consumed in the same condition as purchased), as it does not take into account intermediate goods or those in process, which have been used to produce them.
The aim is to avoid double counting of these intermediate goods. For example, if making bread, the final product price will be counted, and the inputs (flour, water, etc.) will not be counted.
Final goods are not resold and are not used again to produce other goods.