Any time people talk about economic growth and development, it’s almost always referring to GDP or Gross Domestic Product. Now with the ETP and GTP, we’re talking about Gross National Income or GNI. Then there’s GNP or Gross National Product, which is actually the old name for GNI. We’re not even getting into the much less commonly used net aggregates, such as net domestic product (NDP) or net national income (NNI). And then there’s the real (inflation adjusted) versions and the nominal (current market price) versions for all the above. That’s a whole bunch of acronyms to remember, much less put some meaning to.

Worse, there’s actually a number of ways to actually arrive at the same number – the output approach, the expenditure approach and the income approach. You get the same number at the end, but different subdivisions that add up to that number. For example, economists talk about things like private consumption and public consumption, which make up part of GDP.

So let’s boil it down to the essentials, and use an analogy to explain what all those terms mean.

Imagine the whole country is a single corporation. Everybody works for that same company and also owns all the shares in it. The single product made by that company is completely sold every year to its own workers, and there’s nothing left over either of products or of income (nobody saves anything). The company pays out wages for its workers, and all profits are distributed as dividends to shareholders.

In this simplified world:

  1. Quite simply, the company’s earnings – what it gets for its products – is GDP. This is the output approach and is sometimes called the supply side of the economy. In the real world, these will be the productive sectors such as agriculture and manufacturing.
  2. Looking at this in another way, the total amount of money spent (and who spent it) on the company’s products is the exact same amount, and this is the expenditure approach or the demand side of the economy. Private consumption is the amount spent by households, while public consumption is what is spent by governments.
  3. If we divide the company’s same earnings into wages and dividends, that’s the income approach. Some workers will earn only wages, some will earn only dividends, while others earn a little bit of both. But in the final analysis, all earnings end up with households sooner or later.

So the “product” part of GDP is a bit of a misnomer, as is the “income” part of GNI – it’s just looking at the same thing from a different perspective. You could just as easily say Gross Domestic Product (GDP), or Expenditure (GDE) or Income (GDI).

So what GDP actually represents is: what is produced, who buys it, and where the income goes to.

Now let’s look at national instead of domestic income. The different definitions of the two makes it looks easy – domestic is whatever’s made (or bought, or income attributable) within the company. National on the other hand depends on who’s doing the making, buying or receiving, not necessarily in our model company.

So let’s modify the example above and assume that all foreign countries are companies too, and that sometimes these companies exchange workers.

If a worker from our company is working in another company, whatever he earns and spends is counted as our national income, but not part of our domestic income. The opposite is true – anything earned or consumed by a “guest worker” in our company would be counted towards our domestic production and expenditure, but not to our national production and expenditure.

In practice though, what’s taken is only whatever income payments that actually cross “company” boundaries, and in typical bureaucratic fashion is obscurely termed as “net factor payments from abroad” which is actually just a fancy name for wages and dividends.

So if GDP is really just that simple – you add up all company earnings – how come it takes so long to calculate GDP and why does it seem so complicated? In Malaysia, GDP data is only released about two months after the end of the period it’s supposed to represent. That makes it not very useful to most people (except economists I suppose), as you only know what has happened well after the fact.

Well for one thing, if you look at what actually happens in a modern economy, many companies make products that go into other products. Counting up all the company earnings without taking this into account actually gives an inflated view of national income, because many products are actually counted two or three or more times in the final figure, just as certain products are sold on many times through different producers and suppliers before reaching the final buyer. So what we’re actually looking for is only the value of goods and services that make it to the final consumer.

Secondly, sometimes companies produce too much, and can’t sell all their products in one year. Or sometimes, their products sell out and they have to dig into their pre-existing stock of products to meet that extra demand. So there’s an adjustment figure in the national accounts that’s called “changes in inventories”, which is used if there is any over- or under-production.

Third, people don’t spend all of their income at once. Some of it gets saved or invested for a rainy day, typically either through the banking system, or if you’re lucky enough to be able to set aside more, through the capital markets. Companies do the same thing to – there’s usually some cash set aside for investment and as emergency funds.

Then there’s odd types of production that don’t quite fit into this earnings based accounting framework, yet needs to be included for an overall picture of output and earnings, particularly non-profit services such as government.

But setting aside these complications (there’s many more), just remember the basic principle – GDP is what is produced, who spends it, and who gets the income, and they all should equally add up to the same final figure. GNI on the other hand is just GDP plus what Malaysians earn overseas less what foreigners earn here.

*** Note: You can also read Hisham H blog at Economics Malaysia

*** Photo credit: grrlwriter