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Curiosity 2.1: What Is the Difference between GDP and GNP?
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In 1992, the United States joined the rest of the world and made gross domestic product (GDP) the figurehead of its national economic accounting system, replacing gross national product (GNP). GDP measures output produced inside the United States, whether by foreigners or U.S. citizens. GNP measures output of U.S. citizens, no matter where they are located in the world. For many years GNP was slightly higher than GDP, mainly because American corporations abroad earned more than foreign corporations located in the United States, but this difference has slowly been diminishing as year after year more foreign investment flows into the United States than U.S. investment flows abroad. Indeed, in 1998 GDP was slightly larger than GNP ($8,511 billion versus $8,491 billion).
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and farmer (or dividend income to their stockholders), some is wage and salary income to their employees, some is interest income to the banker who has financed their loans (or interest income to those who purchased their corporate bonds), and some is rental income to their landlords. It is because of this equivalence that
total output,
GDP, is referred to as
total income.
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Laypersons' use of the word
income
is slightly different in that it reflects what we receive as income, regardless of whether or not it corresponds to output. There are three differences of note. First, of the dollar's worth of bread, some money will be set aside by the grocer, baker, miller, and farmer to cover depreciation—to pay for replacing their buildings and equipment when they have worn out—and thus will never make it into anyone's pocket as income. Second, if the grocer, baker, miller, or farmer pays any indirect taxes, such as sales taxes, as the bread makes its way through the production process, then this money goes directly to the government and thus also does not make it into anyone's pocket as income. And third, transfer payments make up part of our income, but do not correspond to output produced. Examples are government production subsidies, welfare and unemployment insurance payments, and gifts. Interest on government and consumer debt is also classified as transfer payments because unlike interest paid by business, it does not reflect the cost of production activity. A subset of the national income accounts reports data on these kinds of measures.
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As a nation, our annual income—what we have available to distribute to our citizens—is what we have produced during the year. Despite the fact that individual incomes do not quite match this concept of a nation's aggregate income, we will use the terminologies
aggregate output
and
aggregate income
interchangeably. This thinking suggests that GDP could be measured by adding up all incomes and making adjustments for the phenomena that we have noted. For those interested, appendix 2.1 at the end of this chapter shows how this process would be carried out. Some countries use this method to help in estimating GDP, but the United States uses a different method.
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