Net national product or NNP is the value of finished goods and services produced by the residents of a country, both foreign and domestic, less depreciation on capital goods. Think of this as the gross national product or GNP (the value of all final products and services produced by all residents of a nation without regard to location) less the value of all the capital goods (like machinery, buildings, and equipment) the assets the country wore out (what we call depreciation or the capital consumption allowance) in the production process.
Detailed Explanation:
- Gross National Product (GNP): The total economic output produced by a country’s residents, and includes income from investments abroad, but excludes income from investments or work performed by foreigners while in the country.
- Depreciation: The reduction in the value of capital assets (buildings, machinery, etc.) through their use, obsolescence, and normal wear and tear during the production process.
- Net national product (NNP): The net value of the goods and services available to the country after adjusting for the reduction in the value of capital stock.
NNP Equation:
There are a couple of ways to reference the equation for NNP:
- NNP = GNP – Depreciation
- NNP = Value of Finished Goods and Services Produced by (Residents) (Domestically & Foreign) – Depreciation
Key points about NNP:
- A Better Measure: NNP is a better measure of a nation’s national income and the actual availability of goods and services to be consumed and invested in because it properly accounts for the capital used to produce that output.
- Sustainability Indicator: NNP tells us more about whether the nation is genuinely increasing its wealth or simply consuming its available capital by deducting depreciation. Generally, if NNP is higher in a given year compared to the prior year, it indicates sustainable economic growth.
- Relation to National Income: NNP would equal National Income (NI) if the economy was of the simple closed economy variety without a government sector. In a more complex economy, we need to adjust for indirect taxes and subsidies to arrive at NI, expressed at factor cost, from NNP, expressed at market price.
- Per Capita Income: Per Capita Income is derived from dividing the NNP (or real NNP) by the nation’s total population and is commonly used as a measure of average standard of living.
