Unit 15 — GNP/GDP

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Purpose:

To introduce the viewers to GNP and GDP, and other concepts of the National Income accounts, and to show how they help us understand the growth of the U.S. economy over the past century.

Objectives:

  1. Gross national product (GNP) and gross domestic product (GDP) are the sum of all final transactions in the product markets, in current prices. The difference between GNP and GDP is that GDP looks at production within the U.S., while GNP looks at goods and services produced by U.S. residents wherever those goods and services might be produced.

    1. GNP and GDP in constant prices represent real GNP/GDP from which the effects of inflationary price changes have been removed.
    2. GNP and GDP involve only final transactions (eliminating intermediate goods) or, equivalently, values-added (eliminating purchases by firms from other firms).
  2. In 1991, the Bureau of Economic Analysis, which produces the numbers, changed its primary focus from GNP to GDP.

    1. GDP is better designed to give information on the state of the business cycle within the United States because it is focused only on activity within the United States.
    2. Most other countries were already focusing on GDP, so for international comparability, GDP was a better measure.
  3. The total production of an economy and the total income of the economy represent two different ways of looking at the same thing, as represented in the circular flow.

    1. In a simplified economy, from the product side, GDP and GNP are composed of consumer goods (C), investment goods (I), and government purchases of goods and services (G).
    2. In a simplified economy, from the income side, GDP and GNP are composed of before-tax wages and salaries, rents, interest, and profits—or consumption (C), saving (S), and taxes (T).
  4. The growth of real GDP and GNP per capita over this century has meant vast increases in U.S. living standards. However,

    1. continued growth is not automatic, but involves continuing development of new products and methods; and
    2. the growth of GDP/GNP involves important costs, and thus they are imperfect measures of economic well-being.

Audio and Transcripts

Meet the Series Experts

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Carol Carson

Carol Carson

Director of the Statistics Department of the International Monetary Fund, 1996–2004, and earlier Director of the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.

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Nigel Gault

Nigel Gault

Chief U.S. Economist at IHS Global Insight, responsible for overseeing the IHS macroeconomic forecasts and analyses of the U.S. economy.

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John Kendrick

John Kendrick

Chief Economist for the U.S. Department of Commerce, 1976–1977.

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Robert Nathan

Robert Nathan

Economist and lawyer, renowned for his work during the Depression and World War II and for his ability to explain complex economic theories in plain language.

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Gaylord Nelson

Gaylord Nelson

Wisconsin Governor, 1959–1963, and U.S. Senator, 1963–1981, specializing in the environment and small business.

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WHAT’S YOUR
ECONOMICS IQ?

  1. Which of the following lists of goods and services would be included in calculating GNP?

    Sale of a new automobile manufactured in the U.S. but purchased in Germany; childcare and housekeeping services for which the worker is compensated; the compensated services of a business consultant who provides advice and education, but no products.

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  2. George S. reads in today’s paper that the Consumer Price Index (CPI) for October of 1988 was 120, and that for October of 1989 it is 140. Based on this information, George can conclude that the current rate of inflation is:

    Over 16 percent. The rate of inflation = change in the index/original index, or in this case, 20/120, or 16.67%.

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  3. One of the real limitations of GNP or NNP, from the perspective of most economists, is that these measures:

    Ignore the value workers place on leisure time—even though leisure may contribute to quality of life. All other answers are false.

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  4. Prior to 1929, the general state of the economy was determined by:

    consumers’ personal sense of well-being.

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  5. When Simon Kuznets devised the GNP scale, he made the decision to exclude illegal activities like drug smuggling and gambling from his calculations. Kuznets based this decision MAINLY on the fact that:

    he wanted to focus on productivity that contributed to social welfare.

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  6. The U.S. contribution to the war effort during World War II had what effect on GNP?

    It boosted GNP dramatically.

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Glossary

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Key Terms