Measuring a country's economic output is crucial for understanding its financial health. GDP, the most common metric, can be calculated using two main approaches: expenditure and income. Each method offers unique insights into economic activity.

Beyond GDP, other measures like GNP, NNP, and GNI provide different perspectives on national economic performance. These metrics consider factors such as international production, depreciation, and income flows, offering a more nuanced view of a country's economic standing.

Measuring Gross Domestic Product

Expenditure Approach

• GDP using the expenditure approach is calculated as the sum of four components:
  • Consumption (C) spending by households on goods (food, clothing) and services (healthcare, education), largest component of GDP
  • Investment (I) spending by businesses on capital goods (equipment, structures), residential investment (new home construction), and changes in business inventories (unsold goods)
  • Government spending (G) by federal, state, and local governments on goods (defense equipment) and services (education, infrastructure), excludes transfer payments (Social Security benefits, unemployment insurance)
  • Net exports (NX) calculated as exports (goods and services produced domestically and sold abroad) minus imports (goods and services produced in foreign countries and consumed domestically)
• The expenditure approach formula is: $GDP = C + I + G + NX$

Income Approach

• The income approach calculates GDP by summing the incomes earned by all factors of production in the economy:
  • Employee compensation wages, salaries, and benefits earned by workers
  • Rent income earned from renting land or structures
  • Interest income earned by lenders for supplying funds
  • Profit income earned by business owners and shareholders
  • Proprietors' income earned by non-incorporated businesses (sole proprietorships, partnerships)
• The income approach also includes adjustments for:
  • Indirect business taxes sales taxes, excise taxes, and property taxes
  • Depreciation decrease in value of capital goods due to wear and tear
• The income approach and expenditure approach yield the same GDP value

GDP, GNP, NNP, and GNI

• Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders in a given period, includes output produced by foreign-owned firms operating within the country
• Gross National Product (GNP) measures the total value of all final goods and services produced by a country's citizens and businesses, regardless of their location, includes output produced by the country's firms operating abroad, excludes output produced by foreign firms within the country
• Net National Product (NNP) is calculated as GNP minus depreciation, accounts for the wear and tear of capital goods used in production
• Gross National Income (GNI) measures the total income earned by a country's citizens and businesses, regardless of their location, includes income earned by the country's citizens and firms abroad, excludes income earned by foreign individuals and firms within the country
• Key differences: GDP focuses on production within a country's borders, while GNP, NNP, and GNI focus on production and income by a country's citizens and businesses, regardless of location