Key Macroeconomic Identities Explained

In economics you will come across various macroeconomic concepts like– foreign trade, exports, imports, and goods and services while barely knowing what all these accurately mean. However, to be fluent in economics, one must know that the macroeconomic variable and its identities are important to study. 

Adding to the GDP, there are other important concepts to measure the economic growth which will help the economy to work smoothly. These include the gross national product and the net national product as well. 

Some Macroeconomic Identities 

Gross National Product

The GNP or the Gross National Product measures the total value of all final goods and services which are produced in a particular time period by a country’s residents. To calculate GNP, the economists need to deduct the income which is domestically earned by the foreign individuals and by the foreign companies, this adds income earned by the residents and by the companies working abroad.

There is a basic difference between GNP and GDP. Gross National Product bases and considers on the ownership, while GDP measures the total value of all the goods and services that are being produced in a country regardless of the foreign and domestic ownership. 

GNP is the total household consumption expenditure, the sum of all private investment, also a total of the government expenditure and the net exports. Value is what is added by the economists by the overseas residents and enterprises and deduct the income earned by the foreign residents and the enterprises. 

The household consumption expenditure includes the expenditure on durable goods, nondurable goods, and services. The next component is the private investment, this includes the capital expenditure or investment on new capital for producing the consumer goods. 

Government expenditure refers to the total expenditure which is expended by the federal, state, or by local governments on final goods and services. Finally, there are net exports which are referred to as the difference between the total imports and the exports.  

Net National Product

Now we will understand about the net national product or the NNP. This NNP takes into account the depreciation factor, and what is depreciation?

Depreciation is nothing but the wear and tear of the fixed assets. While in the context of NNP it also refers to the capital used to maintain the existing stock.

NNP is the total value of all the final goods and services that are produced by the factors of production of a country in a specified time chalking out or minus the depreciation amount.

To put it into a formula, NNP = GNP – Depreciation. 

Next, we should know that for calculating NNP, the economists take into consideration two very prior factors that are indirect taxes and subsidies.

The market price of any product comes with taxes, this tax amount goes to the government. Thus, while calculating the NNP, economists are required to deduct the taxes. Also, the government provides subsidies to encourage the production of certain goods and services. This being the case, we are required to add these subsidies while calculating the NNP. The NNP after considering the taxes and subsidies is called the NNP at the factor cost or the national income.

National Disposable Income and Private Income

Apart from these two concepts of GNP and NNP, the other macroeconomic identities that students need to be familiar with are the national disposable income and the private income. The national disposable income refers to the value of all the goods and services that a country has at its disposal.

The national disposable income includes its current transfers from the rest of the world (like gifts and services received from other countries). Hence, the national disposable income refers to the income which an economy has for its own consumption expenditure without having to sell off any assets for the same requirement, this makes the National Disposable Income an important economic indicator. 

Private income is the final value of all incomes that are received by the private sector. In this context, the private sector is referred to as the residents and the enterprises of a country. The Private income includes the national debt interest, and the net factor income from abroad, the current transfers from the government, and the net transfers from other countries.

Gross Domestic Product (GDP) and Welfare

We know what goods and prices are, we also know that these goods and their respective prices do affect the economy. But the question is how? So, in this context, we need to know what is meant by GDP. GDP or the Gross Domestic Product can be described as the total value of goods and services that are being produced in a country within a specific period. The GDP is calculated on an annual basis.

An economy’s GDP can be calculated by using the income and expenditure methods. After knowing the GDP, one can measure it with the GDP of the previous year or any other relevant year for comparison purposes. GDP is here used as a tool to indicate the economic performance of a country.