Question

What is the difference between GNP and GDP? Why goods and services are counted at market price? Discuss. Also define three approaches of measuring national income? Why they give identical results?

Answer 1

Difference between GDP and GNP are

GDP is the total value of goods and services produced within a nation's geographic boundary in a specific time period. GDP=National income=national output=national expenditure

GNP is the total value of goods and services produced by citizens and corporations of a particular country and producing in any country. GNP=GDP+net property income from abroad

• GDP at market price= GDP at factor cost + Indirect taxes - subsidies. As collecting accurate data on factor cost is not possible so goods and services are counted at market prices.
• National income is measured by a) value-added method b) Income method c) Expenditure method

National income by value-added method= GVA at market price - consumption of fixed capital - net indirect tax+ net factor income from abroad= net national product at factor cost

National income by income method= Factor income paid out by industrial sector= consumption of employees + rent + interest+ profit+ net factor income from abroad= net national product at factor cost

National income by expenditure method= Private final consumption expenditure+ Government final consumption expenditure + gross domestic capital formation+ net export- consumption of fixed capital-net indirect tax+ net factor income from abroad=net national product at factor cost.

All these methods calculate net national product at factor cost which is equal to national income so these methods give identical results.