Key measures
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country's domestic territory in a year. It counts production inside the borders, whoever owns the factors.
Gross National Product (GNP) is the value of final goods and services produced by the normal residents of a country, at home or abroad: GNP = GDP + Net Factor Income from Abroad (NFIA) where NFIA = factor income earned by residents abroad − factor income earned by non-residents in the country.
Subtracting depreciation (consumption of fixed capital) gives net measures: NDP = GDP − depreciation; NNP = GNP − depreciation. NNP at factor cost (market price minus net indirect taxes) is called national income. Per capita income is national income divided by population.
Limits as measures of growth and welfare
- Non-market activities such as household work by women and subsistence production are left out.
- Distribution is ignored: GDP can rise while most people's incomes stay the same.
- Externalities: pollution and congestion are not subtracted.
- Defensive expenditures: money spent on cleaning up pollution or treating pollution-related disease is counted as an addition to GDP.
- Depletion of natural capital is counted as income (see natural resource accounting).
- Leisure, health and quality of life are not measured.
- Products such as weapons or tobacco add to GDP whatever their social value.
Because of these gaps, economists have suggested alternatives such as green GDP, the Human Development Index and genuine progress measures.
Key points
- GDP = output within borders; GNP = output of residents.
- GNP = GDP + NFIA; NDP = GDP − depreciation.
- National income = NNP at factor cost.
- GDP ignores non-market work, inequality, pollution and resource depletion.
Exam tips
- If NFIA is negative, GNP is less than GDP.
- Read numericals carefully to see whether depreciation or NFIA is asked for.