GDP or GNP? What’s the difference? How is it calculated?

Gross domestic product (GDP) is the total value of all the final g/s produced in an economy/country, regardless of who owns the FoPs, in a given time period, usually one year. For example, in Switzerland, we count all firms doing business within the borders…the Swiss ones, the Canadian ones, the Thai ones, etc.

Gross national product (GNP), on the other hand, counts the value of all the final g/s produced by an economy’s/country’s owned FoPs, regardless of where they are situated. For example, we take all the Swiss owned productive assets in Switzerland, minus all the foreign ones in the country, plus all those in Germany, South Africa, China, etc.

Net national product (NNP) takes the GNP and subtracts the depreciation of all the capital in that year. Nominal GDP is the number calculated that year for GDP, whereas real GDP takes that number and adjusts it for inflation compared to a base year. When we divide the GDP by the population, we get GDP per capita, one of our (many) indicators of economic development.

How is national income measured?  Via calculating output, expenditure, and/or income, all of which should be equal.  For the output method, the total value of all g/s from each sector is added.  For the expenditure method, the spending by households (C - consumption), firms (I - investment), the government (G) and net exports (NX - exports minus imports) is added.  For the income method, all the wages, rent, interest and profit is added.  Remember, national output = national expenditure = national income!

Evaluation - What are the many limitations of national income data?

Positive Externalities of Consumption

Although some scientists (and self-labeled "experts") question the effectiveness and risk of inoculations (i.e. shots), many people argue that providing vaccinations against various diseases like H1N1 and the mumps prevents such illness from occurring. If I pay to get a shot for H1N1 because I do not want this flu, then I also will not pass this flu to those around me. However, those around me did not have to pay for my inoculation even though they reap the benefits. Therefore, the marginal social benefit of inoculations is greater than the marginal private benefit which does not include society's benefit from less infectious people (MSB > MPB). This is an example of a positive externality of consumption.

The free market for inoculations sees equilibrium at quantity Q1 (and price P1) which is below the socially efficient level of output Q*. Between Q1 and Q*, MSB > MSC and a potential welfare gain is possible (yellow triangles).


What can the government do to intervene in this market failure to achieve this potential welfare gain? First, they could subsidize the consumption of such forms of health care to make the consumption of such goods/services cheaper. In the graph, this is shown by the orange MSC + subsidy curve which reduces the price of inoculations (to P2) and increases quantity to the socially efficient level Q*. However, when governments spend money on subsidies, there is always the argument that this money could have been spent elsewhere (opportunity cost).

Another option would be to spend taxpayer money for a positive ad campaign that would encourage the community to get inoculated against various diseases like H1N1. The aim of this campaign would be to increase consumers' private benefit / utility for consuming vaccinations because they would feel better about protecting themselves against disease. Graphically, this is shown by the orange arrow indicating a rightward shift of MPB towards MSB (and thus Q*). Of course, the opportunity cost argument would apply here as well and often some members of the community are very critical of vaccinations.

Other possible government interventions include forcing the public to get inoculated which might violate civil rights.

Negative Externalities of Consumption

The link between the consumption of tobacco products like cigars and heart / lung disease is indisputable. When individuals smoke cigars, they are compromising their own health and the health of those around them who inhale the smoke. Therefore, smoking is (unfortunately) an excellent example of a negative externality of consumption.

In a free market, consumers as utility-maximizers will consume cigars where their marginal private benefit equals marginal social cost (= S). They do not have to consider the cost of their consumption of cigars on the rest of the community through smoking-related illness and increased public health care receipts. If social efficiency were occurring, the market would be in equilibrium at a quantity level Q* as opposed to the greater Q1. Instead, there is a welfare loss (red triangles) since between Q1 and Q*, MSC > MSB and the market is thus not Pareto optimal. We observe a negative externality of consumption between MPB and MSB (purple arrow).


To address this market failure of a negative externality of consumption of cigars, the government could take several courses of action. First, they could place a tax on cigars in order to increase their price which would drive down the quantity sold and consumed. This is shown above by the broken blue line which corresponds to a return to the socially optimal level of output Q* and a higher price of P2. The government could then use this tax revenue to alleviate stress on the health care system from smoking-related illnesses. Of course, there will be debate on how to spend such money, to what extent smokers have the right to smoke and to what means smokers who face inelastic demand for tobacco products will go to procure cheaper product.

Second, the government could implement a negative ad campaign featuring anti-smoking commercials on television / radio and graphic posters of smoking-related illness on billboards along motorways and in written press. The aim of such an ad campaign would be to reduce smokers' private benefit from smoking by reducing their utility of tobacco consumption. After all, does looking at a black, diseased lung make you feel eager or happy to light up another smoke? This is illustrated above by the horizontal blue arrow and a leftward shift of the MPB curve towards MSB (and, thus, Q* which is socially efficient). However, such a campaign costs (taxpayer) money so the opportunity cost argument will be in play.

Otherwise, the government could simply ban tobacco products. But how would that affect stakeholders in the economy?