Gross National Product: Other Measures of Aggregate Expenditure

Other Measures of Aggregate Expenditure and Income The National Income and Product Accounts includes other measures of expenditure and income that are used to keep tabs on the performance of the economy. This section discusses how gross domestic product, net national product, national income, personal income, and disposable income are related to GNP and how these accounting concepts are used. Gross Domestic Product A portion of the income included in GNP is earned by U.S. citizens working or holding property in foreign nations. For example, the income of a U.S. citizen working in Italy is included in the United States' GNP. Income earned by foreigners who own resources located in the United States is not included in our GNP. Therefore the profit earned by Toyota's U.S. operations is not included in our GNP. Gross domestic product (GDP) measures the market value of final products produced within the boundaries of the United States by deducting U.S. earnings abroad from GNP while adding in earnings of foreign corporations with operations in the United States. GDP is a measure of income resulting from use of all resources within the borders of a nation. To accurately reflect domestic production, international comparisons of the output of nations are sometimes based on GDP rather than GNP. In 1989, real GNP in the United States was $4,117.7 billion. Real GDP for the United States in that year was $4,087.6 billion. Real GDP was less than real GNP in that year because the sum of U.S. earnings of business and labor in the rest of the world exceeded foreign earnings in the United States by $30.1 billion. If a nation's business and labor earnings abroad falls short of the earnings of foreign labor and business domestically, its GDP would be greater than its GNP. Net National Product GNP includes investment purchases reflecting replacement of existing capital goods (including residential structures) that have worn out or become obsolete. To account for net new additions to capital stock, a measure of depreciation of the existing capital stock, the capital consumption allowance must be deducted from the estimate of gross investment. Net national product (NNP) is GNP less capital consumption allowances: NNP = GNP - Capital consumption allowances Net national product is a measure of national production that only includes net additions to capital while excluding any purchases for replacement of worn-out or obsolete capital. Because capital consumption allowances are only very rough estimates of actual depreciation, most economists believe that NNP is not a very reliable indicator of net production. NNP is rarely used in economic analysis because of the dubious accuracy of the NIPA estimate of depreciation. National Income Some of the receipts, such as indirect business taxes and capital consumption allowances, shown on the income side of the statement in Box 5 are not paid out to owners of productive resources. We can, however, make some adjustments to better gauge how much of the value of final products is actually paid out to those whose resources are used in production. National income is a measure of household and business earnings from the use of productive resources over a period of one year. It can be calculated by subtracting indirect business taxes and capital consumption allowances from GNP: National income can also be measured by summing the compensation of employees, rental income, net interest income earned by those who make loans to finance produc-tion, and profits. Personal Income How much income do households actually have available to spend before paying personal taxes? Personal income is a measure of income available to households in a given year. To obtain personal income the following subtractions from and additions to national income are required: 1. Subtract all net interest and corporate profits from national income because these accrue to businesses rather than to households. 2. Subtract social security (payroll) taxes. These taxes are not paid out to individuals and therefore are not available for households to spend 3. Add all personal interest income. This personal interest exceeds the net interest that is initially subtracted because much of the interest earned by individuals is not for finance of production. Included in this is government interest paid to individuals who own government securities. 4. Add personal dividend payments, the portion of corporate profits paid to individu-als. 5. Add all government transfer payments to persons, such as social security pensions and business transfer payments (such as pensions) to individuals. After making these adjustments, the result is a measure of the income from production that actually gets paid out to households during the year along with other income that does not necessarily reflect the sale of productive services. Note that personal income exceeds national income because the additions we make to national income to derive it exceed the subtractions. Personal income is useful as a measure of the ability of households to make purchases, save, and pay taxes. Retail sales forecasters eagerly await the monthly release of personal income estimates because they view trends in the growth of personal income to be of great importance in influencing consumption. Disposable Income The income that individuals have to spend or save after payment of personal taxes is called disposable income. Officially designated disposable personal income in the NIPA, it is obtained simply by deducting personal tax and nontax payments to governments from personal income. Disposable income is closely watched by forecasters as a key determinant of the ability of consumers to spend and save. The table in Box 6 shows how GNP is related to NNP, national income, personal income and disposable income. By moving from the first line to the bottom line you can see how disposable income is derived from GNP in the 1989 National Income and Product Accounts.