Gross domestic product (GDP) is the total market value of all final goods and services produced in an economy in a year or a given time period within a country’s borders (domestic output). This includes all production, both material and intellectual, everything produced by government and private business as well as consumer goods and capital construction. Gross national product (GNP) is the total income earned by a country’s factors of production in a year or a given time period, regardless of where assets are located (nations’ output).
Net national product (NNP) is the total market value of all final goods and services produced by residents in a country during a given time period. The difference between GDP and GNP is the net foreign income (NFI), which is the difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production. The “gross” in GDP and GNP indicates that there is no allowance for depreciation (capital consumption), value lost that occurs to inventory while it sits before being sold or consumed or the amount of capital resources used up in the production process.
That is the difference between GDP and NNP. Depreciation (DP) is a reduction in the value of an asset with the passage of time, due to wear and tear. It can include consumption of goods in the production of other goods or services. Examples are the wear and tear that occurs with capital equipment such as machinery, transportation vehicles, office equipment and tools (all of these items eventually wear down and need to be replaced), accidental damage, obsolescence or retirement of capital assets. GDP is most commonly calculated by the expenditure method.
It is done by adding consumer expenditure (C) + firm’s investments (I) + government spending (G) + exports minus imports (X-M). GNP is calculated by taking GDP + net property income from abroad (NFI). NNP is calculated by taking GNP – DP. For example, if a Chinese company operates and earn profits in Australia, the income is included in Australia’s GDP but not China’s GDP. This is because the production took place in Australia. However, the profits earned are included in China’s GNP but not Australia’s GNP.
This is because China owns the assets. There is also nominal GDP, which is today’s output at today’s prices and real GDP, today’s output at base-year prices. To calculate real GDP, we take the nominal GDP, use a ‘GDP deflator’ and adjust it for inflation. Inflation is the sustained increase in overall level of prices. This will overstate the value of GDP even if there has not been any increase in economic activity. The GDP deflator is a price index, which includes all good and services, rather than just consumer goods and services.
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