Question

Given the following national income accounting data, compute GNP, NNP and NI (all figures are in billions). \(\begin{array}{lc}\text { - Compensation of employees } & 195.6 \\ \text { - U.S. exports of goods and services } & 14.5 \\ \text { - Capital consumption allowance } & 12.3 \\ \text { - Government purchases of goods and services } & 60.6 \\ \text { - Indirect business taxes } & 13.1 \\ \text { - Net private domestic investment } & 63.4 \\ \text { - Transfer payments } & 14.2 \\\ \text { - U.S. imports of goods and services } & 17.8 \\ \text { - Personal taxes } & 43.0 \\ \text { - Personal consumption expenditures } & 230.9\end{array}\)

Short answer

GNP: \(351.6\) billion, NNP: \(339.3\) billion, and NI: \(326.2\) billion.

Step-by-step solution

Calculate Consumption

From the given data, consumption is equal to personal consumption expenditures which is \(230.9\) billion.

Calculate Investment

Investment is given as net private domestic investment which equals \(63.4\) billion.

Calculate Government purchases

Government purchases are given as \(60.6\) billion in the data.

Calculate Net Exports

Net exports are calculated by subtracting the value of imports from the value of exports. From the given data, exports equal \(14.5\) billion and imports equal \(17.8\) billion. Net Exports = Exports - Imports = \(14.5 - 17.8 = -3.3\) billion

Calculate GNP

Using the GNP formula from the analysis, we have: GNP = Consumption + Investment + Government purchases + Net Exports GNP = \(230.9 + 63.4 + 60.6 + (-3.3)\) GNP = \(\$351.6\) billion

Calculate NNP

The formula for NNP is GNP minus capital consumption allowance. The data provides capital consumption allowance as \(12.3\) billion. NNP = GNP - Capital consumption allowance NNP = \(351.6 - 12.3\) NNP = \(\$339.3\) billion

Calculate NI

The formula for National Income is NNP minus indirect business taxes. The data provides indirect business taxes as \(13.1\) billion. NI = NNP - Indirect business taxes NI = \(339.3 - 13.1\) NI = \(\$326.2\) billion To summarize, the calculated values are: - GNP: \(\$351.6\) billion - NNP: \(\$339.3\) billion - NI: \(\$326.2\) billion

Key concepts

GNP Calculation

Gross National Product (GNP) is a comprehensive measure of a country's overall economic output. It includes the value of all final goods and services produced by the residents of a country within a specific time frame, usually a year, regardless of the location where the production takes place.

Gross National Product can be calculated using the following formula:
GNP = Consumption + Investment + Government purchases + Net Exports

In more detail:

• Consumption typically refers to the total value of all goods and services consumed by households.
• Investment is the total spending on goods that will be used for future production. This includes business investments in equipment and structures, residential construction, and inventories.
• Government purchases are the total government expenditures on final goods and services.
• Net Exports are the value of a country's total exports minus its total imports.

Following these components, if the data provides personal consumption expenditures of \(230.9\) billion, net private domestic investment of \(63.4\) billion, government purchases of \(60.6\) billion, and net exports calculated as \(14.5\) billion minus \(17.8\) billion, the GNP is then found by summing these values.

It is important for students to understand that GNP gives a broad perspective on the nation's economic health and includes incomes earned by citizens abroad and excludes incomes earned by foreigners within the nation.

NNP Calculation

Net National Product (NNP) is derived from the Gross National Product (GNP) by accounting for depreciation. Depreciation reflects the wear and tear on the economy's stock of equipment and structures, also known as Capital Consumption Allowance (CCA).

The formula to calculate NNP is as follows:
NNP = GNP - Capital Consumption Allowance

• Capital Consumption Allowance (CCA) represents the portion of the country’s total production that is estimated to have been used up during the period in question.

For example, if we have a GNP of \(351.6\) billion and a capital consumption allowance of \(12.3\) billion, subtracting the allowance from the GNP gives us the NNP. This step is crucial as it gives us a clearer picture of the 'net' production, excluding the value of assets consumed in the process.

Understanding NNP is important for students because it reflects the country's capacity to consume or invest without affecting future production capabilities. In essence, NNP represents the true increase in a nation's wealth during a specific period.

National Income (NI)

National Income (NI) is the total income earned by the residents of a country within a certain period and is a significant indicator of economic health. It is calculated by subtracting indirect business taxes from the Net National Product (NNP).

The formula for National Income is as follows:
NI = NNP - Indirect Business Taxes

• Indirect Business Taxes include taxes such as sales tax, excise tax, and other business taxes that are not directly linked to the income of individuals, and thus need to be subtracted from NNP.

With the given NNP of \(339.3\) billion and indirect business taxes of \(13.1\) billion, the subtraction results in the National Income. It represents the net earnings of the economy's factors of production.

Students should recognize that National Income encompasses earnings from wages, salaries, rents, interest, and profits accruing to the nation’s residents. It is a critical concept in economics that understands and analyzes the wealth generated by a nation and how it is distributed among its factors of production.