Measuring the Size of the Economy: Gross Domestic Product

Other Ways to Measure the Economy

Besides GDP, there are several different but closely related ways of measuring the size of the economy. We mentioned above that we can think of GDP as total production and as total purchases. We can also think of it as total income since anything one produces and sells yields income.

One of the closest cousins of GDP is the gross national product (GNP). GDP includes only what country produces within its borders. GNP adds what domestic businesses and labor abroad produces, and subtracts any payments that foreign labor and businesses located in the United States send home to other countries. In other words, GNP is based more on what a country's citizens and firms produce, wherever they are located, and GDP is based on what happens within a certain county's geographic boundaries. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial.

We calculate net national product (NNP) by taking GNP and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year. The process by which capital ages and loses value is called depreciation. We can further subdivide NNP into national income, which includes all income to businesses and individuals, and personal income, which includes only income to people.

For practical purposes, it is not vital to memorize these definitions. However, it is important to be aware that these differences exist and to know what statistic you are examining, so that you do not accidentally compare, say, GDP in one year or for one country with GNP or NNP in another year or another country. To get an idea of how these calculations work, follow the steps in the following Work It Out feature.

Calculating GDP, Net Exports, and NNP

Based on the information in Table:

  1. What is the value of GDP?
  2. What is the value of net exports?
  3. What is the value of NNP?

Government purchases $120 billion
Depreciation $40 billion
Consumption $400 billion
Business Investment $60 billion
Exports $100 billion
Imports $120 billion
Income receipts from rest of the world$10 billion
Income payments to rest of the world$8 billion

Step 1. To calculate GDP use the following formula:

GDP = Consumption + Investment + Government spending + (Exports – Imports) = C + I + G + (X – M) = $400 + $60 + $120 + ($100 – $120) = $560 billion

Step 2. To calculate net exports, subtract imports from exports.

Net exports = X – M = $100 – $120 = –$20 billion

Step 3. To calculate NNP, use the following formula:

NNP  =  GDP + Income receipts from the rest of the world – Income payments to the rest of the world – Depreciation = $560 + $10 – $8 – $40 = $522 billion