Question

(a) How is the real GDP measured? (b) How can we arrive at the other measures of income in the national income accounts from the Gross Domestic Product, namely, Gross National Product, Net National Product (NNP) and National Income (NI)?

Short answer

Answer: To derive GNP, NNP, and NI from GDP, follow these steps: 1. Calculate GNP by adding net factor income from abroad to GDP. 2. Calculate NNP by subtracting depreciation from GNP. 3. Calculate NI by adjusting NNP for indirect business taxes and subsidies.

Step-by-step solution

Define Gross Domestic Product (GDP)

GDP is defined as the total value of all goods and services produced within a country's borders in a specific time period (usually a year). It is a measure of the economic output and usually used to indicate a country's standard of living.

Explain Real GDP and how it is measured

Real GDP is the inflation-adjusted measure of GDP, which means it considers the changes in prices as well as the changes in the quantity of goods and services produced in the economy. In other words, real GDP measures the total value of goods and services produced in an economy, keeping the value of the base year prices constant. To calculate real GDP, we must first select a base year and find the price level (GDP deflator) for both the current year and the base year. Then, we can calculate the real GDP using the following formula: Real GDP = (Nominal GDP / GDP deflator) * 100

Define Gross National Product (GNP)

GNP is the total value of goods and services produced by the residents of a country, regardless of where they are located (inside or outside the country). GNP includes the income earned by a country's residents, both at home and abroad, but excludes the income produced within the country's borders by non-residents.

Differentiate between GDP and GNP

The main difference between GDP and GNP is the criterion of production location. GDP considers the production within a country's borders, while GNP is based on the production by a country's residents, wherever the production may take place. To arrive at GNP from GDP, we must add net income earned by a country's residents abroad and subtract the net income generated within the country by non-residents. GNP = GDP + Net factor income from abroad

Define Net National Product (NNP)

NNP is the total value of all goods and services produced by a country's residents while accounting for depreciation (capital consumption allowance), which is the wear and tear or the reduction in the value of capital goods (such as machinery, buildings, and vehicles) over time. NNP can be derived from GNP by subtracting the depreciation. NNP = GNP - Depreciation

Explain National Income (NI)

National Income represents the total income earned by a country's residents, including wages, salaries, profits, rent, and interest. It can be derived from NNP by subtracting the indirect business taxes, such as sales taxes and excise duties, and adding subsidies provided by the government. NI = NNP - Indirect business taxes + Subsidies In summary, to obtain the other measures of national income from GDP, follow these steps: 1. Calculate GNP by adding net factor income from abroad to GDP. 2. Calculate NNP by subtracting depreciation from GNP. 3. Calculate NI by adjusting NNP for indirect business taxes and subsidies.