MEASURES OF NATIONAL PRODUCTION AND INCOME

Gross National Product

Gross national product is the nation’s total production of goods and services (usually for a year), valued in terms of the market prices of the goods and services produced. This concept goes directly back to the definition of production above: Production is whatever people will pay for, and what they pay is an economic valuation of the worth of the product or service. Gross national product (abbreviated “g.n.p.”) includes all the economic production in the country in any given time period.

Gross national product is stated in money terms, since this is the only meaningful way of adding together the output of such diverse goods and services as carrots, machine tools, maid ser- vice, air travel, and Fords. Strictly, then, g.n.p. is the money value of total national production for any time period.

Gross national product is also the nation’s total expenditures on goods and services produced during the year. Each unit produced is matched by an expenditure on the unit. Most goods and services produced are bought outright. But how about the ones produced but not sold? Econ- omists regard these as having been bought by the producers who hold them, as inventories. Then it is clear that the production and expenditure totals are identical.

G.n.p. is also the total income received by all sellers of goods and services. What someone spends on current output, someone else receives as income. This is g.n.p. seen from the receipts side.

Thus, it doesn’t matter whether we look at gross national product as (1) the value of all goods and services produced, (2) the sum of all expenditures on those goods and services, or (3) the (gross) incomes received for producing the goods and services. They are all the same thing, and we get the same total each way.

There are two ways to calculate g.n.p., each designed to avoid the danger of double counting in a complex economy. One way is to sum up all expenditures on final products sold to consumers or to businesses for final use as producers’ goods— all spending on potatoes, factories, autos, missiles, legal services, and so on. Note the word “final.” Miners dig iron ore out of the ground and sell it to Bethlehem Steel. Bethlehem makes the ore into steel and sells the steel to Westinghouse. Westing- house makes the steel into refrigerators and sells them to you and me. We don’t count the value of the iron ore, plus the value of the steel, plus the value of the refrigerator. That would involve counting the iron ore three times. Instead, every- thing that is used in another product during the year shows up and is counted only in the final product (in this case, refrigerators), since the value of the final product will reflect the value of all the raw materials, labor, and other productive services included in it.

Producers’ goods, like machinery, which are bought by businesses, pose an obvious problem here, since they are not directly incorporated into the final consumers’ goods the way raw materials are. We count machinery and other producers’ goods once, when they reach their final buyer— for example, when Ford buys a new punch press. Remember that goods in process at the end of the time period are counted as inventories (purchased by the owner) in the latest stage they have reached. This process of summing up all final pur- chases is called the “final-products approach” to estimating g.n.p.

Gross national product can also be estimated in another (equivalent) way: by the “value-added” method. Here the estimators establish the value added to each product by each producer, then sum up all these values. For example, in convert- ing the iron ore to steel above, Bethelehem adds something to the value of the product it passes along. This added value is the difference between what Bethelehem pays for the ore, coal, and other products that it uses and the price at which it sells the steel to Westinghouse; roughly, it is the wages, interest, and rents paid by Bethlehem, plus the profit it earns. Similarly, we can compute the value added by Westinghouse. And so on for each productive unit in the economy. By summing up all the values added, we come out with the gross national product, again avoiding double counting.

Table 4-1 shows who buys the goods and ser- vices in the g.n.p., a useful breakdown in a market- directed economy where production is mainly in response to market demand. Purchasers are di- vided into three big groups: consumers, businesses (buying “investment,” or “producers’,” goods), and governments. To provide historical perspec- tive, Fig. 4-1 then presents the same data from 1929 to 1967. Take a look at the three major seg- ments.

FIG. 4-1 Consumers buy most of the g.n.p. The other third is divided between
private investment and government purchases. (Source: U.S. Deportment of Cam.
merce.)

1. The biggest part of total production has consistently been goods and services for con- sumers—electric fans, stoves, dresses, movies, medical services, hats, and all the other things that consumers buy.

2. The next group is private investment in “producers’ “ or “capital” goods. These are build- ings, machinery, equipment, and other capital goods used in the production of further goods or services. Such producers’ goods are purchased primarily by businesses. But houses are also in- cluded in the investment-goods category, on the grounds that they are so durable that in effect they represent investment goods rendering con- sumer services, even though they are often owned directly by consumers. Business investment also includes—as inventories—any increase in unsold goods in process or final form.

Three important warnings about the private- investment category.

First, “investment” means the purchase of investment goods (buildings, machinery, and so on) produced during the year. For example, if someone buys a ten-year-old factory, this is not investment; the factory was included in the gross national product ten years ago, when it was built.

Second, investment does not include mere financial transfers, such as the purchase of stocks and bonds. For example, if you buy a share of General Motors stock from me, this is not invest- ment for purposes of the national income ac- counts, since it does not pay for any new production.

Third, note that investment includes gross purchases of investment goods. It includes pro- duction that merely replaces depreciating build- ings, machinery, and equipment, as well as pro- duction that represents a net increase in society’s stock of capital goods. We come to the net in- crease in the nation’s capital goods in the section on “net national product” below.

3. Government purchases of goods and ser- vices include both consumption and investment goods. Federal, state, and local governments buy food, police services, and other current consumption items, as well as investment goods such as roads, buildings, and parks. But notice that gov- ernment purchases of goods and services do not include all government expenditures. Govern- ments also spend large sums on “transfer pay- ments” (such as unemployment insurance and social security payments) that are not payments for currently produced goods and services and are hence not included in gross national product.

4. We have included “foreign investment,” or “net exports,” in private investment here, al- though often it is shown as a separate item. In 1966, for example, the U.S. exported $ billion more than it imported, and to be complete we must include this net production in g.n.p. We will pull it out for special attention in Part Six, on “The International Economy.”

To summarize, g.n.p. is made up of: (1) consumer goods and services bought by indi- viduals and households, (2) investment goods bought mainly by busiaesses, and (3) both con- sumer and investment goods and services bought by federal, state, and local governments. In all three categories, remenib~er that only goods and services produced during the current year count; transfers of existing assets are excluded.