The gross domestic product measures the final output by people and businesses located within the United States. However, there are several other national accounts that give a slightly different view of the economy.
Gross National Product
The gross national product (GNP) measures the value of the final output created by Americans, whether they are located within the United States or outside of it. What is included in the gross domestic product (GDP) but not in GNP is the domestic production by foreign workers and companies. So the production of Mercedes-Benz cars in Alabama is counted in GDP but not GNP. On the other hand, the production of cars by GM in China is counted in the GNP but not GDP. The differences between GDP and GNP are small because the additions or subtractions of foreigners working within the United States and Americans working abroad are small relative to the size of the United States economy.
Net Domestic Product
A more accurate measure of growth than the GDP is the net domestic product (NDP), which is simply the GDP minus capital depreciation, which is a measure of the amount of output used to replace aging stock of capital. Net domestic product measures how much the economy has grown. Generally, the smaller the difference between GDP and NDP, the more efficient the economy. The amount of depreciation is lowered by producing better quality that lasts longer, lessening the need for replacement.
Obsolescence also contributes to capital depreciation, since many firms abandon outdated equipment and machinery, since they can reduce their production costs by shifting to new, more efficient machinery and equipment. Because there is always some capital depreciation, the rate of NDB growth will always be less than GDP growth.
National income (NI) sums the total amount earned by Americans for their land, labor, capital, and entrepreneurial talent, whether within the United States or abroad. Hence, national income is sometimes referred to as factor income, because it equals the income received by Americans for all factors of production provided by them. NI can be derived from NDP by subtracting 2 quantities used in the domestic product but not pertinent to the national income. First, net foreign factor income must be subtracted from NDP since it is the income earned by foreigners in the United States minus the income earned by Americans abroad. This makes sense, since the earnings of foreigners should not be included in the United States national income. Indirect business taxes, including sales taxes, excise taxes, custom duties, business property taxes, and license fees are also excluded from NDP because they are not payments for factors of production. National income can also be calculated by simply summing up all employee compensation, rent, interest, proprietors' income, and corporate profits.
Personal income (PI) is all income received by Americans, whether it is earned or unearned. The main difference between personal income and national income is that personal income includes transfer payments, such as private pension payments, retirement benefits, unemployment insurance benefits, veteran benefits, disability payments, welfare, and farmer subsidies. They are called transfer payments because the government takes the money from those who earn the income and gives it to the beneficiaries of the transfer payments.
Additional differences between personal income and national income includes income earned but not received, which must, therefore, be subtracted, from national income plus interest earned from government securities. The interest earned on government bonds, notes, and bills are part of personal income but not national income, because the government is not considered a resource, since it is not a factor of production. Therefore, the interest earned by lending to the government is not counted as part of national income.
Another national account is disposable income (DI), which is simply personal income minus income taxes, what many people call take-home pay. Personal taxes include any type of tax which decreases the income that a person actually receives, such as income and inheritance taxes. Hence, disposable income is the money that people have to either spend or to save.
- Gross Domestic Product (GDP) = Value of Final Output by people and businesses located within the United States, regardless of nationality
- Gross National Product (GNP) = Value of Final Output by Americans, regardless of geographic location
- Net Domestic Product (NDP) = GDP – Capital Depreciation
- National Income (NI) = Total Earnings by Americans for their land, labor, and capital, not including transfer payments, such as Social Security.
- NI = NDP – Net Foreign Factor Income – Income Earned by Americans Abroad – Indirect Business Taxes
- Personal Income (PI) = Total Income Received by Americans (including transfer payments)
- PI = NI – Income Earned but Not Received – Interest Earned from Government Securities
- Disposable Income (DI) = PI – Income Taxes