How is gnp measured

The difference between these two figures is the rate of inflation during the time period. While GNP measures the total supply of output produced during a given period, it then must also equal total demand assuming there are no savings in an economy. The total demand for domestic output is made up of five components: consumption, government spending, investment, net exports , and net factor payments.

Because GNP must equal total demand for output, it can then be expressed mathematically by:. The calculation is broken up as follows:. While GNP measures production, it is also commonly used to measure the welfare of a country. Real GNP growth is seen as an improvement in living standards. Unfortunately, GNP is not a perfect measure of social welfare and even has its limitation in measuring economic output.

Improvements in productivity and in the quality of goods are difficult to calculate. For example, personal computer prices have dropped dramatically since their introduction, yet their capabilities have vastly improved. National income accountants try to adjust for improvements, but the process is not easy and far from precise.

Some outputs are poorly measured because they are not priced in an active market. Work done by volunteers, do-it-yourselfers and stay-at-home parents certainly contributes to a nation's well-being, but this work is not calculated into the GNP because it is not purchased, nor is there an active market to measure the value of such activities.

Further, the recovery efforts for disasters add to GNP, yet the welfare of the nation does not improve. Take, for example the damage done to New Orleans by Hurricane Katrina. Katrina destroyed homes, businesses and resorts. Many people were killed, while many were displaced. Consumer and investment spending to clean up and replace lost possessions and buildings added to C and I in the formula above, while government spending for relief and clean up added to G.

As a result, GNP may have risen, but the welfare of the U. Finally, GNP places no value on leisure time. Most would agree leisure time is important to our well-being. In fact, as countries get richer, citizens generally take more leisure time for themselves. As a result, the gap between GNP and some other measures of national well-being widens as a country's fortunes improve.

As you can see, the GNP has its limitations. It adds the costs associated with correcting social ills, but charitable works often are not accounted for. While not precise, it is still a useful tool in measuring a nation's economic output and overall demand. It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue. Asset turnover ratio can be different fro. Choose your reason below and click on the Report button.

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It is included in GDP because it adds to the health of the U. Similarly, the shoes made in a Nike plant in Korea will be counted in U. GNP, but not GDP, because the profits from those shoes will boost Nike's earnings and stock prices, contributing to higher national income. It doesn't stimulate economic growth in the United States because those manufacturing jobs were outsourced. It's Korean workers who will boost their country's economy and GDP by buying local goods and services.

It gives a slightly inaccurate picture of how domestic resources are used. GNP is also affected by changes in a country's currency exchange rates. If the dollar weakens, then the foreign holdings of U. But that may not accurately reflect the state of the U. A weaker dollar can eventually boost GDP because it makes exports cheaper, which increases sales and production. That makes it possible to compare the GNP of countries with different population sizes.

The World Bank also uses the purchasing power parity PPP method, which excludes the impact of exchange rates. Instead, it values each nation's output by what it would be worth in the United States. The Factbook notes that in many emerging markets, such as Mexico, money made by residents overseas is sent back to their home countries. This income can be a significant factor in boosting economic growth and would be counted in GNP, but it isn't counted in GDP—which may cause the economic power of these economies to be understated.

Bureau of Economic Analysis. Accessed May 13, Corporate Finance Institute. The World Bank.