Page 57 - Introduction to Business

CHAPTER 1 What Is Business? 31

ple example of how an increase in national output (in services) raises national
income by the same amount. The $15 you pay the hairstylist for a haircut represents
the market value of the service that he or she provides you, so your visit to the hair-
stylist raises GNP by $15. But the $15 you pay the hairstylist also raises his or her
income by that amount. So national income GNI rises by $15 as well.
Countries these days report gross domestic product (GDP) rather than GNP as gross domestic product (GDP) The total
their primary measure of national economic performance. The GDP measures the dollar value of all final goods and
services produced each year within a
total dollar value of all final goods and services produced each year within a coun-
country’s borders
try’s borders regardless of who owns the resources (see Exhibit 1.7). For example, a
Mexican migrant worker who works on a California farm will increase U.S. GDP,
although she or he is not a U.S. citizen. On the other hand, GDP does not include
profits earned by U.S. companies overseas or the goods and services produced by
Americans overseas, since those products and services were produced abroad, not
in the United States. Thus, GNP (or GNI) equals GDP plus net receipts of factor
income from the rest of the world. These receipts are what domestic residents earn
on the wealth they hold in other countries less the payments made to foreign own-
ers of wealth located at home.
By breaking down GDP into its components, one could analyze how, for exam-
ple, consumption is affected by a recession and the important role consumers play
in the U.S. economy. This approach (as well as by utilizing the World Development
Report as a source) allows for comparisons across countries and also provides evi-
dence about why consumers in some countries are rich while others are not. A
major drawback of GDP/GNP/GNI analysis is that these indicators do not include
nonmarket (unpaid) activities such as housework, yard work, or volunteering.
Therefore, when a person quits doing housework and hires a maid, or you quit
doing your own yard work and hire a landscaper to mow your lawn, GDP, GNP, and
GNI will increase.
The ultimate measure of economic success is a country’s ability to generate a
high level of and steady growth in the output of goods and services regardless of
whether we use the GNP, GNI, or GDP standard. The higher the level and faster the
growth rate of an economy, the richer and better off the consumers of that country
are. The GNI, GNP, or GDP can be measured in current prices; this is called nomi- nominal GNI, GNP, or GDP Economic
nal GNI, GNP, or GDP. One can also measure GNI, GNP, or GDP on an inflation- output measured in current prices
adjusted basis; this is called real GNI, GNP, or GDP. Inflation basically moves the real GNI, GNP, or GDP Economic output
measured on an inflation-adjusted basis
general price level up. Economists use a price index number to “deflate” a current,
or nominal, GNI, GNP, or GDP to a real GNI, GNP, or GDP using a certain base year
(the International Monetary Fund [IMF] currently uses 1995 as the base year; that
is, the GDP deflator is 100 for 1995). (See Exhibit 1.8 on p. 32 for details.)
nominal GDP
Real GDP
GDP deflator

EXHIBIT 1.7
The Components of U.S. GDP, 2001

GDP 100%
Government
Private consumption Investment
68% 21% expenditures
14%
Note: figures may not add up to 100% because of rounding error. Net exports –3%
Source: World Bank, World Development Report, 2003.

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