PRSTONUTONY 10 AY EU XEDIIE VARLBLES The gross national product (GNP) measures the total value of goods and services ‘owned by residents of the United States. It is the most widely known measure of the performance of the U.S. economy, but its days are numbered. The Commerce Department has decided to deemphasize GNP in favor of another measure: gross domestic product (GDP). GDP measures the value of goods and services produced within the United States. In other words, GNP records the value of production by ‘American residents without regard to their location, while GDP only counts produc- tion within U.S. borders. ‘Although the difference between the two measures is relatively small, the ‘Commerce Department has decided that GDP provides economy-watchers with a better sense of how the U.S. economy is performing. Understanding how the economy and its components are performing is a necessary step to proposing corrective policies. This article discusses the difference between the two measures and why the switch was made, ‘After studying your text, reading the article, and answering the questions, you should be able to: @@ Describe the difference berween GNP and GDP @ 6 Discuss the relative strengths and weaknesses of both measures of aggregate economic performance @ Distinguish between changes in real and nominal GNP or GDP 4 _ Describe other modifications to the national income and product accounts of the United States that have been introduced by the Commerce Department itera os Prview © Commerce Depart ment officials are advising the public pay closer attention|to GDP and less atten-| tion to GNP. @ The switch to GDP aligns the United States with prevailin} measures in most other countries Also, by not conside ing earnings from American-owned investments in other countries, GDP gives a better picture of what is happening to the US. economy. @ The Commerce Department has made a number of other changes to the national income and product accounts, including a change in the base year. 25:he Commerce Department is likely to announce to- day that upon closer ex- amination, the American economy grew a little more slowly in the 1980s than it thought. The conclusion arises froma sweep- ing revision of what has long been the government’s principal economic scorecard, the gross national product. Not only is Commerce recalculating GNP, it is also advising the public to pay attention to a different economic ‘gauge, the gross domestic product, or GDP. The changes are intended to give the publicand policy makers a better sense ofhow theUS.economyisperforming. ‘Asa consequence, Commerce officials said, officials and political leaders will be in a better position to make policy choices. What's the Difference? GNP vs. GDP Painting by a New Set of Numbers ‘The officials said they are shifting to GDP from GNP because the former measures production of goods and ser- vices in just the United States. GNP, on the other hand, includes the amount by which earings on American-owned investments in other countries exceed cearningson foreign-owned investments here, sometimes causing the GNP fig- ures to give a misleading reading of the economy’s health. Coincidentally, 2nd Quarter 1980 CRUDE OIL PRICES $40 $30 $20 $10 JA 8 0 41990 Source: Michael Drew—The Washington Post When ol prices shot up last year, oil companies’ profits overseas surged and helped inflata the gross. rational produc total 3rd Quarter 1990 The gross domestic product excludes earings on USS. investments abroad. By excluding the oll companies’ overseas profits, a decine in US. production is apparent from the second quarter to While the fourth-quarter figures for both GNP and, GDP deciined, the GNP fell less, in part because of ‘continued high profits for U.S. ‘ll companies overseas,Japan’s EconomicPlanning Agency aid yesterday it will place more emphasis ‘onGDPforthesamereason, Bloomberg, Business News reported. ‘Commerce is also changing the base year, or starting point, it uses for calcu- lacing the future impact of inflation on the economy. Ifthe new numbers do show slower ‘growth, they could providenewammu- nition for Democratic attacks on Presi- dent Bush for the economy's lackluster performance in recent years and the lack ofa plan to accelerate the nation’s recovery from recession. ‘The change primarily responsible forreducing the country’s reported eco- nomic growth rate will be a shift to 1987 from 1982 as the base year for ‘Commerce's calculation of changes in the nation’s “real,” or inflation-ad- justed, GNP and GDP. The department also will provide new “benchmark” estimates for both measures based on a wide range of newly available data from economic censuses, personal and corporate tax returns and other sources. ‘At the same time, it will change definitions of some types of economic transactions. eee ee cael emma All of these changes are meant to account for shifts in prices, consumers’ tastes technological advances and other developments that ultimately are re- flected in economic statistics. Previously published figures incor- poratingthe change in the base year but not the benchmarking or definition changes show that the economy grew ‘anaverage of 0.2 percentage point less ‘each year from 1981 to 1990 than was the case with the 1982 base year. On the same basis, the available figures indicate that the recession that began in August 1990 was somewhat deeper than depicted by the current GNP numbers, but that it ended with stronger growth in the second quarter of this year than the current numbers indicate. Tn the unrelated switch to emphasiz~ ing gross domestic product instead of ‘gross national product, Commerce is seeking to avoid the sort of problem thatcropped up a year ago when world oil prices shot up after Iraq invaded Kuwait. Therisein oil prices anda huge drop in consumer confidence plunged an al- ready weakly growing U. S. economy into recession. John M. Berry, “Painting by a New Set of Numbers,” The Washington Post, December 4,181 ‘©1981 The Washington Post. Reprinted with permission. But the extent of the decline inf. productior. of goods and services was masked somewhat in the GNP ntum- bers by a saarp rise in profits that[U.S. ‘oil companiies earned abroad. ‘Those profits showed up in GNP as part of what is known as “the rest-of- the-world” sector. This restofithe: world sector is not included in gross domestic product. For that reason, Commerce officials regard gross domestic product not pnly asa better measure of U.S. production and of the health of the American ‘economy, butas.a measure less likely to be distorted by unusual events, such as. the volatility of oil company profits or abrupt, larze changes in the value of the dollar. | Just as rising made the economy's decline look milder Jate last year than it really was, in terms. of U.S. production, the decline in those profits early this year made it appear from the GNP numbers that) the ‘economy kept shrinking in the April- Jane period. Instead of the 0.5 percent annual rate of de real GNP that quarter, real GDP showed a 0.3 percent in- crease. ‘company profitsOUG ES) Ted OLNMS 1, a) Define GNP. 1) Brify describe how the Deparment of Commerce calculates GNP bythe + expenditure approach * factor income approach. + output approach 2. a) Define GOP. b) Inorder to calculate GDP, what changes have to be made tothe + expenditure method? ‘factor income method? + output method? 3. a) Would Honda Corporation's earnings from its US. production facities be counted in U.S. GDP, GNP, or bot? Explain your response. b)_ Would Marathon Oil earnings from its Kuwait operations be counted in U.S. GDP, GNP, or both? Explain your answer,21 GHAPTER S1_ 1G DiFFERENC) 4, a} Define nominal and real GDP. b) Why is it useful to distinguish changes in real GDP from changes in nominal GDP? }_ Hows the change in real GDP calculate from the change in nominal GDP? d) Whatis meant by the term “base year"? €), Why does the Commerce Department perioially update the base year for the calculation of GDP (or GNP)? 5. ) Commerce Department officials stated that changes in real GDP, rather than GNP, give @ more accurate picture of whatis happening to the U.S. economy. Do you agree or disagree with the Commerce Department's assessment? Why? ') Under whet circumstances would there be no difference between the estate of GDP growth and the estimate of GNP growth?