The Differences Between the GDP and the NNP
Macroeconomics, which includes the study of national income accounting, includes three major metrics to measure a country's economy: gross domestic product or GDP, gross national product or GNP, and net national product or NNP. These metrics account for a country's economic performance and allows it to be compared objectively with that of other countries.
Gross domestic product, also known as GDP, represents the aggregate production value of a country's goods and services combined in a given time window. This includes all production, both material and intellectual. It also includes everything produced by government and private business as well as consumer goods and capital construction. Net national product, or NNP, represents a mathematical result of a country's production after accounting for depreciation of inventory.
The Capital Consumer Allowance represents a significant variance between GDP and NNP. This factor equals the depreciation value lost that occurs to inventory while it sits before being sold or consumed. It can include consumption of goods in the production of other goods or services. A common example includes the wear and tear that occurs with capital equipment such as assembly line machinery, transportation vehicles, office equipment and tools. All of these items eventually wear down and need to be replaced.
To better understand how GDP converts to NNP, an example of a farm may help. A farmer goes out on the land he owns and plants 10,000 boxes of tomato seeds. This produces 500,000 tomato boxes at harvest time, which is the farmer's GDP. However, some of the value of the harvest is lost to harvesting, labor, transportation and storage. This equals 110,000 tomato boxes. Thus the net figure of 390,000 boxes is the Net National Product of the farmer since he had to account for his operating costs of 110,000 boxes lost.
Financing accounts for another element between GDP and NNP. When payments of GDP value need to be paid to other countries, which occurs as a result of cash flow financing, it reduces GDP value. This, along with depreciation, gets to the value of NNP mathematically. Countries with significant national debt can find their economies being squeezed significantly as they struggle to make required payments to lenders, similar to someone suffering from too much credit card debt in personal finance.