What Is a Nominal GNP?

Nominal GNP is one way to measure a nation's wealth.

Nominal gross national product, or GNP, is a macroeconomic measure of the total productivity of a nation's permanent residents. It takes the consumption of goods, investments and net exports by permanent residents as well as government expenditures excluding transfer payments, such as Social Security. Macroeconomic indicators such as nominal GNP are often assumed to represent a nation's overall economic health, although this is not strictly true.

Definition

Nominal GNP only measures the productivity of permanent residents. For instance, if someone lived in Canada but worked in the United States, his salary would be included in Canada's GNP, not America's. Similarly, if an investor from Great Britain invests in a factory in the United States, that would be included in Great Britain's GNP. The gross domestic product includes all products within a nation regardless of who produces it. The Canadian worker's salary and the British investment would both be included in America's GDP.

Types

Nominal GNP does not take inflation into account. A growth in nominal GNP could indicate that a nation is producing more, or that it is producing more and prices have gone up. To get rid of this ambiguity, economists compare nominal GNP from different years to a single reference year. Dividing the nominal GNP by a GNP deflator, which is essentially a measure of inflation between the reference year and the current year, gives the real GNP. The change in real GNP tells how much productivity has actually grown or shrunk. Nominal GDP and real GDP are related in the same way.

Measuring

When measuring GNP, it is important to only include the sale of finished products to avoid double counting. If someone buys a cake, the cost of the cake would be added to the nominal GNP, but the price of the eggs, milk and flour, the cost of transporting ingredients to the bakery, the various farmers' wages and so forth would not be counted in nominal GNP, because the cost of the cake already accounts for each of these things. Of course, many goods are not produced within a single country, so imports from other countries are deducted from a nation's GNP.

Alternatives

Measuring nominal GNP by adding consumption, investment, government spending and net exports is the expenditures approach to measuring GNP; an income-based approach is also possible. National income includes wages, rents, interest and profits. The GNP can be calculated from the national income by adding in indirect business taxes that would normally be considered a part of the business's productivity and subtracting out the depreciation of capital. The expenditures approach is more typical.

Criticism

Although a strong GNP growth is often reported as a a sign that society is doing well overall, this is not necessarily true. The most common criticism is that because GNP is an aggregate measure, it does not tell us anything about the distribution of income. So if one sector of the economy grows rapidly while another sector fails, simply saying that the GNP is growing glosses over some of the complexity of a large economy. There are other criticisms based on limitations in measuring GNP. For example, countries with large underground economies, such as in the developing world, may have a great deal of productivity that goes unreported. If that economic activity starts to be counted, it might incorrectly look like economic growth.

References

• California State University Northridge: Business 302: Macroeconomics
• State University of New York at Oswego: National Income Accounting

Resources

• Massachusetts Institute of Technology Open Courseware: Principles of Macroeconomics