Other Measures of Total Production and Total Income - Online Tutor, Practice Problems & Exam Prep

Gross Domestic Product (GDP) measures the value of final goods and services produced domestically, while Gross National Product (GNP) focuses on the production by a nation's citizens, regardless of location. Net Domestic Product (NDP) is calculated as GDP minus depreciation. National Income reflects total earnings from expenditures, and Personal Income includes household income, excluding corporate earnings. Disposable Income is personal income after taxes, available for consumption or savings. Understanding these concepts is crucial for analyzing economic performance and the impact of fiscal policies.

Other Measures of Total Production and Total Income

So we focus mostly on GDP, gross domestic product, as a measure of production or income in a society. Let's go ahead and go through some other measures as well that sometimes come up. So we're mostly going to take a definitional approach and just discuss on a high level some of these other topics that come up because they're kind of rare. They are not tested as often, but I wanted to make sure you had a resource for these other special topics that come up here. Alright. So we mostly focus on GDP because that's what gets used as this measure most often. And remember, that's the value of goods and services produced domestically, right? Final goods and services, the value of those final goods and services produced domestically as we've focused on throughout all of these videos. Now, there's another one like GDP called GNP. So instead of domestic product of things produced domestically, we want to think about things produced by our nation. So sometimes, our citizens will produce stuff overseas, right? Or sometimes, foreigners will produce stuff inside domestically within our borders. However, another measure is to focus on just our citizenry. What did our citizens produce whether it was here or abroad? So what we're going to have to do is include goods and services produced by US owned facilities and exclude goods and services produced by foreign-owned facilities. Okay? So GNP is going to take a little different approach and just focus on our citizens instead of domestic. What is produced domestically, okay? Now, GDP is generally a better measure because it takes into account this foreign investment because sometimes in developing countries, there's a lot of foreign-owned investment that gets put into that country and that wouldn't be included in GNP. So these foreign investments would not be included in GNP and it would make their production seem smaller even though they have a lot of production happening although it's not, domestic owned by that nation. It's investment from other companies, other countries, right? So that's GNP. Let's move on to the next one here. Net domestic product. So net domestic product is pretty easy. It's just GDP minus depreciation. Okay. We're taking depreciation out of our GDP calculation, right? Because we have gross. Gross means in total, net means adjusted for, in this case, depreciation. Gross minus something equals net. Okay? So net domestic product is just GDP minus depreciation. Let's go on to national income. So national income is the flip side of what we've been learning. When we've talked about GDP, we focused on the expenditures approach, right, where we were taking consumption plus investment plus government purchases plus net exports and that was equal to GDP, but we could think of it the other way. Remember, from this approach, we're thinking of everything that gets spent, all the consumption, everything households spend, investment, spending by businesses and that type of investment, government spending, right? Spending. Spending. However, we can think of it from the other approach where everything that gets spent gets earned by someone else. So expenditures equal income in theory. Right? So the expenditures are going to equal the income. So we could think of national income as another way to measure GDP. Okay? So the total value of expenditures must, on the other hand, be earned by the sellers of whatever is being spent on. But this is generally beyond the scope of the course, more likely that you're just going to need to know the definition if anything. Next is personal income. So what do you think? Personal income? It's income received by households. So it's going to exclude corporations in that case. We're just thinking about the actual, you know, population of the country. So this is also going to include transfer payments such as welfare. Oh, I've got it written there at the end. So, yeah. Welfare or interest on financial investments, that's going to be included in personal income. The main thing is that we're leaving out the income of the income of corporations there. It's just the household income. So we can adjust that personal income to be disposable income. So we're just going to take out taxes. So it's the income received minus taxes. Well, that's what's left over to be spent. When we talk about disposable income, that's money that you have left over to spend on whatever you want. Okay? So this represents the money that's actually how households spend their money on. They can spend it on consumption or savings. And we're going to get more into the idea of savings and how that affects the economy in other videos. But that's basically what disposable income can be used for, current consumption right now or saving for future consumption. Cool? Alright. So this is mainly just the definitions that you want to be aware of. Nothing too, too important in this video compared to our main discussion in this section about GDP. Alright? Let's go ahead and pause here and move on to the next video.

Here’s what students ask on this topic:

What is the difference between GDP and GNP?

Gross Domestic Product (GDP) measures the value of final goods and services produced within a country's borders, regardless of who owns the production facilities. In contrast, Gross National Product (GNP) focuses on the value of goods and services produced by a nation's citizens, regardless of where they are located. This means GNP includes the production of U.S. citizens and companies abroad but excludes the production of foreign entities within the U.S. GDP is generally preferred for measuring economic performance because it accounts for foreign investments within a country, which can be significant in developing economies.

How is Net Domestic Product (NDP) calculated?

Net Domestic Product (NDP) is calculated by subtracting depreciation from Gross Domestic Product (GDP). Depreciation represents the wear and tear on capital goods over time. The formula for NDP is:

$\mathrm{NDP}=\mathrm{GDP}-\mathrm{Depreciation}$

By accounting for depreciation, NDP provides a more accurate measure of the economy's net production, reflecting the actual value of goods and services available for consumption and investment after maintaining the capital stock.

What is the significance of National Income in macroeconomics?

National Income represents the total earnings from the production of goods and services within a country. It is significant because it reflects the income earned by all factors of production, including wages, rents, interest, and profits. National Income can be viewed from the expenditure approach, where total spending (consumption, investment, government purchases, and net exports) equals total income. This concept helps economists understand the distribution of income among different economic agents and assess the overall economic health. It also aids in analyzing the impact of fiscal policies on income distribution and economic growth.

How is Personal Income different from Disposable Income?

Personal Income is the total income received by households, including wages, salaries, transfer payments (such as welfare), and interest on financial investments. It excludes corporate earnings. Disposable Income, on the other hand, is Personal Income minus taxes. The formula for Disposable Income is:

$\mathrm{Disposable\; Income}=\mathrm{Personal\; Income}-\mathrm{Taxes}$

Disposable Income represents the amount of money households have available for spending on consumption or saving. It is a crucial indicator of consumer spending power and overall economic activity.

Why is GDP generally preferred over GNP for measuring economic performance?

GDP is generally preferred over GNP for measuring economic performance because it accounts for all production within a country's borders, including foreign investments. This is particularly important for developing countries, where foreign investment can significantly contribute to economic growth. GDP provides a comprehensive view of the economic activity within a country, reflecting the total value of goods and services produced domestically. In contrast, GNP focuses on the production by a nation's citizens, which may not fully capture the economic contributions from foreign entities operating within the country. Therefore, GDP is a more accurate measure of a country's economic performance and overall economic health.