Transcript GDP and GNP
GDP and GNP Anonas, Aquino, Gayanelo, Taylo What is GDP? Gross Domestic Product (GDP)’s technical definition is the total value of the production and consumption of all the goods and services of the country. How is GDP computed? GDP can be solved using the formula: GDP = Consumer Spending (C) + Investment (I) + Government Spending (G) + (Exports (X) - Imports (M)) Explanation of Formula Consumer spending is the sum of expenditures by households on durable goods, nondurable goods, and services. Examples include clothing, food, and health care. Investment is the sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing. Explanation of Formula Government spending is the sum of expenditures by all government bodies on goods and services. Examples include naval ships and salaries to government employees. Net exports equals the difference between spending on domestic goods by foreigners and spending on foreign goods by domestic residents. In other words, net exports describes the difference between exports and imports. What does GDP indicate? This number is important because it gives an indication of how successfully society is addressing the scarcity problem. A larger gross domestic product, there are more goods and services that can be used to satisfy unlimited wants and needs. What is excluded in GDP? Intermediate goods Transfer payments Home Production Pollution/environmental damage Illegal Goods Types of GDP Nominal GDP is the sum value of all produced goods and services at current prices. Real GDP is the sum value of all produced goods and services at constant prices (price from a specified base year) By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services. *GDP deflator: is the ratio of nominal GDP to real GDP for a given year minus 1. The GDP deflator illustrates how much of the change in the GDP from a base year is reliant on changes in the price level. While Real GDP captures changes in quantities and Nominal GDP captures both changes in prices and changes in quantities, the GDP deflator captures changes in the price level. Is GDP an effective indicator? GDP can show a country’s production, but it is not a reliable indicator for a country’s welfare or well-being. What is GNP? Gross National Product (GNP)’s technical definition is the combined value of all the final goods and services produced in a country during an accounting year, including net factor income from foreign countries. How is GNP computed? GNP can be solved using the formula: GNP = GDP + Net factor income from abroad (difference between income earned in foreign countries by residents of a country and income earned by foreign nationals domestically). Explanation of Formula GNP includes the final value of goods and services produced by the residents of a country, without considering their geographical location. Based on this definition, net income from abroad is necessary since in order to focus only on a specific country, income from foreign residents must be subtracted. What does GNP indicate? GNP helps to measure the contribution of residents of a country to the flow of goods and services within and outside the national territory. What is excluded in GNP? Similar to that of GDP (household work and illegal goods/services, etc.) Is GNP a good indicator? It is not an effective indicator for a country’s welfare. GDP vs. GNP GDP is the sum value of all goods and services produced within a country. GNP is the sum value of all goods and services produced by permanent residents of a country regardless of their location. GDP of a particular country, production by foreigners within that country is counted and production by nationals outside of that country is not counted. For GNP, production by foreigners within a particular country is not counted and production by nationals outside of that country is counted. GDP vs. GNP GDP is the value of goods and services produced within a country. GNP is the value of goods and services produced by citizens of a country. GDP GNP Definition: An estimated value of the total worth of a country’s production and services, calculated over the course on one year GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically Stands for: Gross Domestic Product Gross National Product Formula for Calculation: GDP = consumption + investment + (government spending) + (exports − imports) GNP = GDP + NR (Net income from assets abroad (Net Income Receipts)) Layman Usage: Total value of products & Services produced within the territorial boundary of a country Total value of Goods and Services produced by all nationals of a country (whether within or outside the country) Application (Context in which these terms are used): To see the strength of a country’s local economy To see how the nationals of a country are doing economically