Measuring Total Output and Income

Read this chapter, to learn about measuring domestic output, and attempt the "Try It" exercises. The material in this chapter concentrates on the four components of GDP: consumption, investment, government purchases, and net exports. Pay attention to the definition of these components as it may differ from your expectations. For example, note that Investment does not refer to the common knowledge definition of investment as in the trading of stock and bonds. Instead, the Investment component refers mainly to the purchase of physical machinery and equipment needed in the production of goods and services. You will revisit certain sections of the chapter later in this unit.

6.1 Measuring Total Output

GNP: An Alternative Measure of Output

While GDP represents the most commonly used measure of an economy's output, economists sometimes use an alternative measure. Gross national product (GNP) is the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country.

The difference between GDP and GNP is a subtle one. The GDP of a country equals the value of final output produced within the borders of that country; the GNP of a country equals the value of final output produced using factors owned by residents of the country. Most production in a country employs factors of production owned by residents of that country, so the two measures overlap. Differences between the two measures emerge when production in one country employs factors of production owned by residents of other countries.

Suppose, for example, that a resident of Bellingham, Washington, owns and operates a watch repair shop across the Canadian–U.S. border in Victoria, British Columbia. The value of watch repair services produced at the shop would be counted as part of Canada's GDP because they are produced in Canada. That value would not, however, be part of U.S. GDP. But, because the watch repair services were produced using capital and labor provided by a resident of the United States, they would be counted as part of GNP in the United States and not as part of GNP in Canada.

Because most production fits in both a country's GDP as well as its GNP, there is seldom much difference between the two measures. The relationship between GDP and GNP is given by

Equation 6.3

GDP + net income received from abroad by residents of a nation = GNP

In the third quarter of 2011, for example, GDP equaled $15,176.1 billion. We add income receipts of$792.2 billion earned by residents of the United States from the rest of the world and then subtract income payments of $524.9 billion that went from the United States to the rest of the world to get GNP of$15,443.4 billion for the third quarter of 2011. GNP is often used in international comparisons of income; we shall examine those later in this chapter.