Formula to calculate Gross National Product (GNP).
Gross National Product is the total amount of final goods and services and inventories (stocks of manufactured and semi-manufactured goods) which the labour and capital of a country (factors of production) working on its natural resources produced in a year.
When we express the value of this aggregate output in money, it is called Gross National Income.
Gross National Product at Market Price is the market value of the aggregate goods and services produced in a country in a year. It may be noted that national income is an aggregative fund concept. It makes use of the value determined by the measuring rod of money as the common denominator for the purpose of aggregating the diverse outputs resulting from different types of economic activities.
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Similarly, it is also a flow concept. It represents a given amount of aggregative per unit of time, conventionally represented by one year. Thus, national income or national product usually relates to a particular year and indicates the aggregate money value of the flow of the output during that year.
The final output in a modern economy consists of a large number of goods such as oranges, bread, pants, tables, pencils, bush shirts, cement, steel and services such as medical, educational, legal, domestic, etc. Let us denote the amounts of each of these different types of final outputs in a given year as Q1, Q2, Q3, Q4…, Qn, and their respective market prices as P1, P2, P3, P4…Pn, where n stands for the total number of final goods and services produced in the economy. Thus, according to production approach the size of (N.I) will be equal to the sum of the annual flow of final goods and services valued at their respective market prices.
While measuring the Gross National Product, only those goods and services are counted which are to be finally consumed, i.e., intermediate product to be used for producing other products are excluded. An automobile is a final product while steel is an intermediate product. Sometimes, however, it is not easy to distinguish between a final and an intermediate product. Therefore, an alternative method of avoiding double counting is to find out the total net value added in different ‘industries’ in the economy.
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The concept of GNP is a rough and ready measure of the performance of the economy. It is easy to calculate and understand it. Thus, GNP is the sum of the value of final products or expenditures (GNE) or the sum of the value added or the sum of the factor incomes, i.e., sum of distributive shares. Therefore,
GNP ≡ GNE ≡ GNY1
However, two things should be carefully noted about GNP. Firstly, it is a monetary measure of the total goods and services produced during the period, because there is no other method of adding up the heterogeneous types of goods and services. GNP thus obtained is what economists would call Nominal GNP. But nominal GNP cannot be used to compare one year with the other.
The figures of GNP are adjusted for price changes in order to measure correctly the changes in physical output during different periods. We may find that the nominal GNP for a particular year may be greater than previous year only because prices had risen, there being no change in actual production. For comparisons over time we need real GNP—obtained when any changes in prices of goods and services which enter into output have been removed or taken care of, Real GNP is the measure of actual production not distorted by changes in price level.
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Secondly, in calculating the value of production, we must take care to avoid double counting: raw materials or semi-finished products delivered by certain firms are further processed by other firms. Only the value added must be taken into account, i.e., the value of goods and services produced after the value of purchases from other firms has been deducted.
Thirdly, comes the problem of distinction between final and intermediate products. The Department of Commerce of USA defines such a final goods as one produced and/or purchased but not resold during the current accounting period. Goods purchased for resale, with or without further processing in the physical sense, are termed ‘intermediate goods’, and all such goods are excluded from the national products total.
The essential point in the argument is that products should be counted as final if the consumer purchases them for the independent use and the contribution these make to his welfare. Coal purchased by the household for direct consumption is final product but by a steel mill is an intermediate product.
To sum up, the GNP total as estimated by the Department of Commerce of USA includes the final output of the business, government and foreign sector of the economy plus a small product originating in the household of those goods not appearing in markets, only the imputed value of payments in kind to employees, retained output of producers, rental values of owner occupied houses, and the non-monetary income and product flows of financial intermediaries are included. Excluded are the money payments representing transfers of income, capital gains and losses (whether realised or not) and gains resulting from illegal activities.
The substantive strength of the GNP concept lies in that it reflects, more accurately than any other derived statistical concept, the actual condition of production and employment during the period in question. GNP figure represents the gross value of final products turned out by the whole economy in a specified period. Moreover, it avoids many conceptual and statistical difficulties involved in estimating the value of capital consumed or depreciated as well as many arbitrary assumptions involved in reducing a product figure to an income figure.
Concept of NNP has great advantage of clarifying the net increase in total products over and above current consumption and current replacement investment. Moreover, it stresses the long term significance of maintaining and improving the physical productivity of capital for economic growth as a result of which NNP concept uniquely fits for the purposes of economic growth studies.