Here are three ECONOMIC APPLICATION TOOLS that will be helpful in this lesson

ECONOMICS STUDY GUIDE

18 GNP AND CIRCULAR FLOW

Here are three ECONOMIC APPLICATION TOOLS that will be helpful in this lesson.

The Gross National Product (GNP) is the total retail market value of all goods and services produced in a nation during a given period, usually a year.

The Net National Product (NNP), is the gross national product minus capital consumption (depreciation).

Depreciation is the reduction in the value of capital goods because of the wear and tear on them in producing other goods. This is also called "capital" consumption. A reminder that capital is a man-made instrument of production: a factor of production used in furthering the production process. (Example, a machine, building, computer system, etc.)

Learning about and understanding the Circular Flow, the GNP, and the NNP is essential for a basic economics education.

GNP is the Gross National Product. NNP is the Net National Product.

To calculate the NNP, the depreciation rate is subtracted from the GNP.

Understanding the circular flow of the Gross National Product can be difficult. We need to examine the items that make up the GNP.

First, let's review the factors of production introduced in earlier chapters.

Please examine the circular flow of the economy with supply and demand.

The classical model's answer to resource allocation is the market mechanism.

Through the interaction of supply and demand, price determines the answers to our basic economic questions What? How? and For Whom?

Land - produces money in the form of rent

Labor - produces wages as earned from income

Capital - produces interest earned from investment and/or savings

Management - produces profit

Government - produces taxes (which becomes income to the government)

We will be adding to this list as we learn about social programs, monetary and fiscal policy, and foreign trade.

By now you should have a clear understanding of the definitions of GROSS and NET.

Whether you are studying about personal or national incomes or measurement of individual wealth, remember:

GROSS means the total amount without any deductions.

NET means the GROSS amount minus all deductions, exemptions, or depreciations.

The difference, for instance, in gross national trade and net national trade is the difference in the total amount of goods the U. S. sold to other countries, minus the total amount of goods that America bought from other countries.

The hope is that the U. S. sold more than it purchased. If this is true, the net trade would be a positive amount.

If we bought more than was sold to other countries, the net would be a negative amount.

The hope is that the U. S. sold more than it purchased. If this is true, the net trade would be a positive amount.

If we bought more than was sold to other countries, the net would be a negative amount.

Let's look at some terms that will help you understand these concepts:

Aggregate consumption:

The total amount of consumption of a product.

Aggregate production:

The total amount of production of a product.

Aggregate demand:

The total demand for a product or service.

Deflation

A period of time when the value of money is down and there are more goods offered than there are consumers demanding the goods.

Durable Goods

Goods which do not wear out quickly, such as cars, refrigerators, and other appliances.

Imports

Goods produced outside of the U. S. and sold and shipped for use in America.

Inflation

A time when there is too much money in circulation and not enough goods and services to buy; too much money chasing too few goods.

During a period of inflation, prices go up because there is a lot of money in circulation and goods cannot be produced fast enough.

Flow of earnings

The flow of earnings begins with the factors of production (where earnings are created) and follows into all of the areas where these earnings travel as they enter expenditures for other goods and services, savings, investments, income to government, and to create more money when made into loans to others.

Expansion is created by investments and savings.

Formula for GNP

The total of all goods and services produced in a given year.

Formula for net exports

Net Exports = Gross Exports - Gross Imports (NE = GE - GI)

Gross exports is the amount of goods sold to other countries.

Net exports is the amount of gross exports minus the amount of goods bought from other countries.

Labor force(s)

All people between the ages of 18 and 65 who are willing and able to work.

NNP

Net national product: gross national product minus depreciation

Non-durable goods

Those items that wear out with use, such as clothing, household items, etc.

Personal savings

Money individuals do not need in order to live; money that is put into savings and/or investments in order to earn interest and grow.

Price index

A compilation and average of prices of specific products using a base period as the point from which to measure future changes.

Unemployment

The number of people willing and able but who are not working.

As the definition stated, during inflation there is money to spend but little to spend it on.

The price of goods is driven up in periods of inflation.

Deflation is the opposite of inflation.

In periods of deflation, there is little money and a surplus of goods.

Prices fall during periods of deflation.

In either situation, there can be chaos and instability in the economy.

Now let's put a few of these terms together to better your understanding of economics!

Gross National Product

The gross national product (GNP) is the market value of all final goods and services produced in an economy over a specific period - usually a year.

There are three general categories that are omitted from this measurement:

1. Home gardens, or products made by home

projects

2. Yard work, house work, and similar services paid

for in cash but not reported for tax purposes

3. Illegal sales of drugs, etc. which are sold

underground and are not reported

The formula for calculating the gross national product is:

GNP = C + I + G

C = consumption expenditures

I = investment expenditures

G = government expenditures

In other words -

GNP = wages + rent + interest + profits

NNP = GNP - depreciation

With the right tools, these calculations can be done quickly.

Examine the two charts to determine how a change in gross investment from 130 to 150 billion dollars will affect the GNP.

SUMMARY

A reminder that the GNP is the market value of all the final goods and services produced in a country during a given year.

Only final goods are counted.

For example, the production of tires, steel, upholstery, and so on that are used to make a car is not counted.

Only the final good, the car, is counted in the GNP.