Measures of an Economy's Income

Measures of an Economy's Income

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Today, most economists, as well as people who write or speak about the economy, use Gross Domestic Product as the standard measure of the size of an economy. This was not always the case, however, and there are reasons why economists might specifically want to look at some variations on GDP. Five common variations are explained here:

  • Gross National Product (GNP): Rather than counting all income earned within a country's borders regardless of who produces it, as with GDP, gross national product counts all income earned by the permanent residents of a country. If all of the residents of a country worked within that country and no foreigners worked in the country, GNP and GDP would be the same. As workers start crossing country borders, on the other hand, GNP and GDP become noticeably different, but still very similar, measures of income.
  • Net National Product (NNP): Technically speaking, the net national product is equal to gross national product minus depreciation. Depreciation is simply the loss in value of capital and assets due to use, so it's helpful to think of NNP as the part of GNP that went to make new stuff as opposed to making stuff to replace items that were getting worn out. (Note that you could technically define a net version of any of the measures listed here by subtracting out depreciation.)
  • National Income (NI): National income is equal to the net national product after indirect business taxes (sales taxes, excise taxes, etc.) are subtracted out and business subsidies are added in. In this way, national income represents the payments to owners of the factors of production. This includes the owners of labor (i.e. workers), as well as owners of capital, such as land, buildings, and money, who lend out this capital in return for interest payments.
  • Personal Income (PI): Personal income represents income received specifically by individuals and by companies that are not classified as corporations. Therefore, personal income subtracts out items such as retained earnings of corporations and corporate income taxes. On the other hand, personal income includes transfer payments from the government such as welfare and Social Security.
  • Disposable Personal Income: Disposable personal income is equal to personal income minus government obligations. These government obligations include not only taxes but also fines and other related payments.

In general, all of these quantities tend to move roughly in tandem, so they all tend to give roughly the same picture of an economy. In order to avoid confusion, economists usually use the gross domestic product only to describe the size of an economy.


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