What it means
Gross national product, or GNP, counts everything produced by a country's residents and businesses, including what they earn from operations abroad, and excludes what foreign residents produce inside the country. But producing output uses up machines, buildings and vehicles, and a nation that ignores this overstates how well off it is.
Net national product corrects for this wear. The deduction is called depreciation, or the capital consumption allowance in national accounts.
If an economy produces $1,500 billion of output but uses up $200 billion of capital to do so, only $1,300 billion is truly added to the nation's wealth. That remaining amount is the net national product, often shortened to NNP.
Economists prefer NNP when thinking about sustainable living standards. If a country spends all its gross output on consumption, it will have nothing left to replace worn capital, and future output will fall.
NNP shows the most that could be consumed while keeping the capital stock intact. NNP is linked to other national account measures.
Gross domestic product measures production inside borders, gross national product adjusts it for income flowing to and from abroad, and national income is obtained from NNP by adjusting for taxes and subsidies on production. Businesses use these figures to judge the size and growth of markets and to compare countries.
The nuance is that depreciation is hard to measure. Statisticians estimate how fast assets lose value, using assumptions about asset lives, so NNP is less precise than gross figures.
For this reason, many commentators still quote gross measures, even though the net version is conceptually more meaningful. In practice, analysts look at growth rates of NNP and GNP side by side.
If gross output grows faster than net output over many years, depreciation is taking a larger share, which usually means the economy is investing mainly to replace old capital rather than to expand. That pattern can be a warning sign for future productivity.
In practice
Real-world examples.
Example
A statistics agency reports a gross national product of $800 billion and capital consumption of $90 billion. NNP is $710 billion. An analyst notes that NNP grew more slowly than GNP because the capital stock is ageing.
Example
A government advisor in an economy with heavy industry argues that headline growth overstates progress. Depreciation has risen from 10% to 15% of output as factories age. After deducting it, NNP growth is only 1% instead of 3%.
Example
A multinational planning team compares two markets. Market A has GNP of $400 billion with depreciation of $40 billion, while Market B has GNP of $420 billion and depreciation of $84 billion. The team concludes Market A has the larger net output at $360 billion against $336 billion.
Formula
Calculation
Net national product = gross national product - depreciation (capital consumption allowance)
A country has a gross national product of $1,500 billion. Its machinery, buildings and infrastructure lose $200 billion of value during the year through wear and obsolescence. NNP = 1,500 - 200 = $1,300 billion. Depreciation is therefore 200 / 1,500 = 13.3% of gross output, and if depreciation rose to $260 billion, NNP would fall to $1,240 billion.Case study
Seen in the real world.
Valmora is a fictional country that celebrated when gross national product reached $600 billion. In this illustrative story, an economist at the central bank pointed out that heavy use of its mining equipment and ageing power grid meant capital consumption was $110 billion, leaving NNP at $490 billion. The finance minister had not looked beyond the gross figure.
The government responded by committing a larger share of mining revenue to replacing equipment and upgrading the grid. Over five years capital spending rose and depreciation stabilised, while NNP grew steadily. The episode showed that a country can look richer than it is when it neglects the upkeep of its capital. The ministry now publishes both gross and net figures in its annual budget statement so that the gap is visible to parliament and to lenders.
Watch out
Common mistakes.
- Confusing NNP with net domestic product. NNP is based on the output of residents wherever located, while net domestic product is based on production inside the borders.
- Treating GNP as the sustainable figure. Gross output ignores the replacement of worn capital.
- Assuming depreciation is a cash cost. In national accounts it is an estimate of the value of capital used up.
Questions
People also ask.
What is the difference between GNP and NNP?
NNP equals GNP minus depreciation, so it is always smaller and gives a net picture.
Why do some countries have a large gap between GDP and GNP?
Because they receive or pay large amounts of income from abroad, such as profits of foreign-owned companies.
How is NNP used by businesses?
Companies use it with other national account data to size markets, compare countries and plan investment.
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