Understanding GNP, GDP, and Key Economic Indicators

Posted on Feb 28, 2025 in Economy

GNP (Gross National Product): The value of all goods and services produced by a country’s factors of production and sold in the market in any given period. GNP only accounts for final goods to avoid double accounting. GNP must equal national income. GNP measures the production of national factors of production within the country or abroad.
Adjust GNP in two ways:
  • Include depreciation: Machinery wears out and loses value over time. GNP – depreciation = Net National Product (NNP)
  • Include unilateral transfers: Transfers sent to a country without any compensation, for example, money sent to retirees living abroad or foreign aid. Unilateral transfers are part of the national income but not part of its product.
GDP (Gross Domestic Product): Measures the volume of production within a country’s borders – everything that has been produced in a country, regardless of the origin of the factor of production.

GDP Four Elements:

  • Consumption: The portion of GNP purchased by private households. It is what you, as a citizen, buy to fulfill your needs and wants. For example, consumption includes spending on food, a laptop, or a dinner in a restaurant.
  • Investment: This is the portion of production consumed by private companies to produce their own output. Be careful not to confuse it with the meaning we give at home: as the purchase of stocks or funds for individuals. Examples include consulting services and facilities built.
  • Government Purchases: All the consumption and investment of local and national authorities, from the construction of a hospital to the money spent on education. Transfer payments, those in which the recipient does not provide anything in return, are not considered, for example, unemployment insurance payments.
  • Current Account: Is the difference between exports and imports. It is part of the balance of payments.

When a country is importing more than it is exporting, we say it has a current account deficit. If it is exporting more than it is importing, it has a current account surplus. If a country is incurring a current account deficit, it has to fund it somehow.

If we are importing more than what we are exporting, we need to borrow money and thus increase our foreign debt. That means that at some point in the future, we will have to export more than what we import. Having a long and sustained current account deficit can lead to a large foreign debt and a negative net international investment position (IIP), the difference between a nation’s claims on foreigners and its liabilities to them.

Will depreciation improve the situation of a current account deficit? It depends; exports will be cheaper, and imports will be more expensive.

Industrial Production

Industrial production refers to the output of industrial establishments and covers sectors such as mining, manufacturing, and public utilities (electricity, gas, and water). This indicator is measured in an index based on a reference period that expresses change in the volume of production output.

Household Disposable Income

Real household net disposable income is defined as the sum of household final consumption expenditure and savings, minus the change in net equity of households in pension funds. This indicator also corresponds to the sum of wages and salaries, mixed income, net property income, net current transfers, and social benefits other than social transfers in kind, less taxes on income and wealth and social security contributions paid by employees, the self-employed, and the unemployed.