Page 23 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes 2.2.2 GNP as a Sum of Expenditures on Final Products

Expenditure on final products in an economy can be classified into the following categories:
Personal Consumption Expenditure (c): The sum of expenditure on both the durable and
non-durable goods as well as services for consumption purposes.

Gross Private Investment (I ) is the total expenditure incurred for the replacement of
g
capital goods and for additional investment.
Government Expenditure (G) is the sum of expenditure on consumption and capital goods
by the government, and
Net Exports (Exports - Imports) (X - M) constitute the difference between the expenditure
or rest of the world on output of the national economy and the expenditure of the national
economy on output of the rest of the world.

GNP is the aggregate of the above mentioned four categories of consumption expenditure. That
is,
GNP = C + Ig + G + (X - M)

2.2.3 GNP as the Total of Factor Incomes

When national income is calculated after excluding indirect taxes like excise duty, sales tax, etc.
and including subsidies we get GNP at factor cost as this is the amount received by all the factors
of production (indirect taxes being the amount claimed by the government and subsidies
becoming a part of factor income).
GNP = GNP – Indirect taxes + Subsidies
FC MP
2.2.4 Net National Product (NNP)

The NNP is an alternative and closely related measure of the national income. It differs from
GNP in only one respect. GNP is the sum of final products. It includes consumption goods plus
gross investment plus government expenditures on goods and services plus net exports. Here
Gross Investment (GI) is the increase in investment plus fixed assets like buildings and equipment
and thus exceed Net Investment (NI) by depreciation.

GNP = NNP + Depreciation

Note: NNP includes net private investment while GNP includes gross private domestic investment.
We know that during the process of production, assets get consumed or depreciated. So, during
a year the net contribution to output is the production of goods and services minus the depreciation
during the year. This is known as NNP at market prices because it is the net money value of final
goods and services produced at current prices during the year after depreciation.
NNP = GNP - Depreciation
= C + I + G + (X - M) – Depreciation
g
= C + G + (X - M) + (I – Depreciation)
g
= C + G + (X - M) + I (where In = net investment)
n
= C + G + I + (X - M)
n

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