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Lecture 24

# ECON 2400 Lecture 24: Lesson 24 Premium

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School
Department
Economics
Course
ECON 2400
Professor
prof Antone
Semester
Fall

Description
Lesson 24 Gross National Product and What Does GDP Leave Out? Before 1991, gross national product (GNP) was used in the United States as the official measure of aggregate production. In line with international practice, however, the official measure became GDP in December of 1991. In practice, there is little difference between GDP and GNP in the United States, but in principle the difference could matter significantly. GNP measures the value of output produced by domestic factors of production, whether or not the production takes place (as is the case for GDP) inside U.S. border. For example, if a Nike plant in Southeast Asia is owned and managed by American residents, then the incomes accruing to U.S. factors of production include the managerial income and profits of this plant, and this is included in U.S. GNP, but not in U.S. GDP. Similarly, if a Honda plant in Ohio has Japanese owners, the profits of the plant would not be included in GNP, as these profits are not income for American residents, but the profits would be included in GDP. Gross national product is the sum of GDP and net factor payments (NFP) from abroad to domestic residents or GNP = GDP + NFP, where NFP denotes net factor payments from abroad. For 2011, GDP for the United States was 15,094.0 billion, and GNP was 15,339.5 billion, so NFP was 245.5 billion. Thus, for this typical year, the difference between GDP and GNP for the United States was 1.62 of GDP, which is small. For some countries, however, there is a significant difference between GDP and GNP, particularly for those countries where a large fraction of national productive capacity is foreign owned, in which case NFP is significant. What Does GDP Leave Out? GDP is intended simply as a measure of the quantity of output produced and exchanged in the economy as a whole. Sometimes GDP, or GDP per person, however, is used as a measure of aggregate economic welfare. There are at least two problems with this approach. The first is that aggregate GDP does not take into account how income is distributed across the individuals in the population. At the extreme, if one person in the economy has all the income and the rest of the people have no income, the average level of economic welfare in the economy would be very low. Second, GDP leaves out all nonmarket activity, with work in the home being an example.
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