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 Measuring National Output and National... From GDP to Disposable Personal Income

An important distinction is the difference between gross national product (GNP) and GDP. Many people (such as your parents or grandparents) grew up with GNP as the primary measure of the output of the economy. Now, however, GDP is more commonly used. If your parents or grandparents ask about the differences between these two concepts, would it not be nice to be able to answer them? Let us take a brief look at the difference.

Conceptually, GNP measures the output of all domestically owned factors of production, while GDP measures the output of factors of production located within the domestic economy. How do these differences translate into the real world? Consider, for example, a Honda automobile assembled in Tennessee. If the car is sold in the United States, it will be counted in GDP because the factory is located within the United States. It would not be counted in GNP, however, because a foreign company owns the factory. Conversely, consider a Chevrolet factory located in Mexico. Because it is owned by a United States corporation, the value of the cars produced there would be counted in GNP. Since the cars are not produced within the United States, the value of these cars would not be included in GDP.

REALITY CHECK: To get a firmer grasp of the idea, think of a country like Saudi Arabia. Which is larger, GNP or GDP? On the one hand, there are many foreign workers employed in Saudi Arabia. The output of these foreign workers is part of Saudi GDP, but not GNP. On the other hand, Saudi Arabians own businesses, real estate, and other assets in other countries. The income derived from these assets is included in Saudi GNP, but not GDP, because the production takes place abroad. In theory, either answer could be correct, but in fact, Saudi earnings from foreign assets are so large that they dominate the foreign worker effect. Saudi Arabia’s GNP is significantly larger than its GDP.

The concept of GNP leads directly to the economic measure of national income, discussed above, and to the measures of per-capita income, such as personal income and disposable personal income. The following table shows the path from GDP to the other measures of economic output:

We start with GDP and add receipts of factor income from the rest of the world, then subtract payments of factor income to the rest of the world. That gives us GNP. We then subtract depreciation and have net national product, or NNP.

NNP less indirect taxes minus subsidies (note, that’s the difference between indirect taxes and subsidies) and plus other gives us national income.

National income was all the income earned; personal income is the income received. So to get from national income to personal income, we subtract all the income that was earned but not received: corporate profits minus dividends, and social insurance payments. Then we add the income that was received but not earned: personal interest income and transfer payments.

REALITY CHECK: If you work, you should be familiar with the idea that you don’t “take home” all of the money you earned. Even if we don’t consider income taxes, there are still those FICA deductions that represent payments into Social Security, etc. That’s what is meant by social insurance payments in the table above.

Finally, we subtract personal taxes and we have disposable personal income, the income that households can either spend or save.

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