The broadest and most widely used measure of national income is gross domestic product (GDP), the value of expenditures on final goods and services at market prices produced by domestic factors of production (labor, capital, materials) during the year. It is also the market value of these domestic-based factors (adjusted for indirect business taxes and subsidies) entering into production of final goods and services. "Gross" implies that no deduction for the reduction in the stock of plant and equipment due to wear and tear has been applied to the measurements and survey-based estimates. "Domestic" means that the GDP includes only production by factors located in the country--whether home or foreign owned. GDP includes the production and income of foreigners and foreign-owned property in the home country and excludes the production and incomes of the country's own citizens or their property located abroad. "Product" refers to the measurement of output at final prices as observed in market transactions or of the market value of factors (inclusive of taxes less subsidies) used in their creation. Only newly produced goods--including those that increase inventories--are counted in GDP.
For the United States, GDP replaces gross national product (GNP) as the main measure of production. GDP measures the output of all labor and capital within the U.S. geographical boundary regardless of the residence of that labor or owner of capital. GNP measures the output supplied by residents of the United States regardless of where they live and work or where they own capital. Conceptually, the GDP measure emphasizes production in the United States, while GNP emphasizes U.S. income resulting from production.
GDP is one measure, but not a perfect measure, of the well-being of the citizens of a country. For example, homemaker income is not traded in markets, and so is not included in GDP. (Because stay-at-home moms are not paid salaries, there are no government records for how much output they produce for their families.) Economic Indicators, from the Social Studies Help Center.
The Gross National Product (GNP) is a nation's total output of goods and services produced BY a country in one year. In obtaining the value of the GNP, only the final value of a product is counted (e.g. homes but not the construction materials they were built with). The three major components of GNP are consumer purchases, government spending, private investment and exports. The formula is thus:
C + G + I + X = GNP
... The fourth factor is the exclusion of non market activities. Non market activities are those activities that do not take place in the market, and most of them are not accounted for because of measurement problems. Such activities include services people provide for themselves like home maintenance, and the service homemakers provide.
Interactive graphic showing correlation between GNP and life expectancy, population, phone use, and much more, by country over a period of years. Select your choice of variables, display styles, and watch the changes over time!
A Little History: Primary Sources and References
First measurements of GNP: Simon Kuznets, biography from the Concise Encyclopedia of Economics
Simon Kuznets is best known for his studies of national income and its components. Prior to World War I, measures of GNP were rough guesses at best. No government agency collected data to compute GNP, and no private economic researcher did so systematically, either. Kuznets changed all that. With work that began in the thirties and stretched over decades, Kuznets computed national income back to 1869. He broke it down by industry, by final product, and by use. He also measured the distribution of income between rich and poor.
The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.