Other Measures of Income

When the U.S. Department of Commerce computes the nation's GDP every three months, it also computes various other measures of income to get a more complete picture of what's happening in the economy. These other measures differ from GDP by excluding or including certain categories of income. What follows is a brief description of five of these income measures, ordered from largest to smallest.

Gross national product (GNP) is the total income earned by a nation's permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. For example, when a Canadian citizen works temporarily in the United States, his production is part of U.S. GDP, but it is not part of U.S. GNP. (It is part of Canada's GNP.) For most countries, including the United States, domestic residents are responsible for most domestic production, so GDP and GNP are quite close.

Net national product (NNP) is the total income of a nation's residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economy's stock of equipment and structures, such as trucks rusting and light bulbs burning out. In the national income accounts prepared by the Department of Commerce, depreciation is called the “consumption of fixed capital”.

National income is the total income earned by a nation's residents in the production of goods and services. It differs from net national product by excluding indirect business taxes (such as sales taxes) and including business subsidies. NNP and national income also differ because of a “statistical discrepancy” that arises from problems in data collection.

Personal income is the income that households and non-corporate businesses receive. Unlike national income, it excludes retained earnings/profit, which is income that corporations have earned but have not paid out to their owners. It also subtracts corporate income taxes and contributions for social insurance (mostly Social Security taxes). In addition, personal income includes the interest income that households receive from their holdings of government debt and the income that households receive from government transfer programs, such as welfare and Social Security.

Disposable personal income is the income that households and non-corporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain nontax payments (such as traffic tickets).

Although the various measures of income differ in detail, they almost always tell the same story about economic conditions. When GDP is growing rapidly, these other measures of income are usually growing rapidly. And when GDP is falling, these other measures are usually falling as well. For monitoring fluctuations in the overall economy, it does not matter much which measure of income we use.

Ex. 1. Match the Russian word combinations with their English equivalents:

Ex. 2. Complete the following sentences use the prompts below:

1. ________________ is the most widely used measure of a nation’s economic performance and is the market value of all final goods produced in the country during a period of time.

2. To avoid double counting. GDP does not include _____________.

3. The ______________ sums the four major spending components of GDP consisting of: consumption, investment, government, and net exports.

4. GDP minus depreciation of fixed capital equals ______________.

5. ___________ is total income received by households and is calculated as national income minus corporate taxes, retained earnings, social security taxes plus transfer payments and net interest from government securities.

6. ___________ is personal income minus personal taxes.

7. ___________ measures all final goods produced in a given time period valued at the prices existing during the time period of production.

8. ___________ is the value of all final goods and services produced during any time period valued at prices existing in a base year.

9. ___________ is the market value of all final goods and services produced by a nation’s residents no matter where they are located.

10. ___________ are finished goods and services produced for the ultimate user.

11. The gross domestic product minus depreciation of capital work out in producing output is _________.

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Words for reference: intermediate goods; net domestic product; personal income; disposable personal income; nominal GDP; real GDP; final goods; net domestic product; gross domestic product (GDP); expenditure approach; gross national product (GNP).

Ex. 3. Complete the following sentences:

1. Gross national product (GNP ) differs from GDP by…

2. Net national product (NNP)is the total income of…

3. National incomeis the total income earned by…

4. National income differs from net national product by…

5. Personal incomeis the income that…

6. Unlike national income, personal income excludes…

7. Disposable personal income equals…

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