How to Calculate the Net National Product

If you’re not an economist or trading foreign currencies, you might ask yourself why you need to know anything about the net national product. It’s a valuable figure to small business owners because it can help determine the likelihood that a small business will succeed. The figure is a huge predictor of the strength of a country’s economy.

Think of it this way: If the net national product seems to be shrinking, entrepreneurs may want to consider diving into some recession-proof industries like collection agencies or auto repair (the fewer people buying new cars, the greater a need for maintenance on older cars). If the net national product is rising, they may wish to focus on consumer-led industries like retail sales and luxury travel.

So, how do you determine a country’s net national product? It’s a simple formula.

Net National Product Definition

The net national product definition needs some context. Every country has its own economy, but each country’s economy fits into the greater scheme of the world economy. The net national product is one of the ways you can accurately measure a nation’s economic success. It’s the monetary value of all of the goods and services produced by a country’s citizens over a select period of time.

A less complicated way to think about the net national product is to consider it a net national income. It’s the value of a country’s products after you subtract the depreciation of the assets used to create those finished goods and services.

An important thing to know about the net national product is that it doesn't exclude foreign-made products. It includes both goods and services that are produced domestically and overseas, which is a huge caveat when you look at countries like the United States that do a great deal of manufacturing in places like China. For example, all those iPhones that Apple makes in their Shenzhen, China, location count toward the United States’s net national product.

Net National Product vs. Gross National Product

The net national product definition is slightly different from that of both the gross national product and the more often talked about gross domestic product. Gross domestic product, which is typically used as a sort of scorecard to weigh the strength of a country’s economy, accounts for only goods and services made within a specific country’s borders. If a country largely utilizes overseas manufacturing, it’s not the most accurate measure.

Instead, the gross national product works better. It includes goods made both inside and outside of a country, but it doesn’t include the depreciation of those goods. In life, things depreciate and we need to spend money to keep production standards high. Enter: net national product. The net national income can only be derived after you subtract depreciation from the gross national product. This figure is a clearer picture.

Measuring Depreciation

Depreciation, an integral factor in the net national product, is also referred to as capital consumption. Physical capital includes things like machinery or real estate (the tangible aspects of doing business) and human capital covers skills, knowledge and abilities (the education, training and manpower required to produce the goods and services that make up the net national product). These things depreciate in two ways.

Physical capital depreciates based on physical wear and tear. You see this when machinery has to be repaired or replaced. The depreciation of human capital is rooted in workforce turnover. The more employees that turnover, the more resources companies must spend to train and find new talent.

Net National Product Formula

The net national product formula is quite simple. You can calculate it one of two ways depending on the figures you have at hand:

  • The market value of all finished goods + the market value of all finished services - the depreciation of those goods and services = net national product

  • The gross national product - depreciation = net national product

What does that look like in terms of a country's economy?

Here's an Example

Country A produces $1 trillion worth of goods and $3 trillion worth of services within a year. Collectively, the goods and services total $4 trillion. That's the gross national product. Unfortunately, the assets used to create those goods and services depreciate by $500 billion (think the same way the value of your car depreciates once you first drive it off the lot and start to rack up miles). The net national product formula would look something like:

$4 trillion (the gross domestic product) - $0.5 trillion (depreciation) = $3.5 trillion (net national income/net national product).

The $3.5 trillion figure is a far more accurate depiction of an economy's success than the $4 trillion gross domestic product in the same way a company's value is rooted in the actual profits they make after they spend their income running the business.