Net National Product

What is Net National Product (NNP)?

The net national product refers to the total market value of finished goods and services that are produced by both domestic and foreign citizens of a nation. The calculation is usually done for a term of one year. So, when we talk about NNP we observe the market value of finished goods and services.

The value of NNP can be obtained by subtracting the value of depreciation from the Gross National Product of a nation.

NNP considers all products produced by the citizens of a country irrespective of their location. Therefore, NNP is a value that shows the total monetary output of citizens living within the country or from overseas.

As NNP indicates the consumption of a nation, it is considered one of the key indicators of the growth of an economy.

Understanding NNP

NNP is one of the most important indicators of the growth of industries in an economy as a whole. When the value of NNP declines, businesses usually tend to move to industries that are considered recession-proof. On the other hand, when the value of NNP rises, businesses tend to move to consumer-led industries, such as travel and tourism.

The depreciation value considered in the calculation of NNP includes the wear and tear of capital assets. It also includes the depreciation of human capital that takes place due to workforce turnover. The extent of workforce turnover helps companies understand the resources that must be spent by companies to find new employees.

The NNP can be calculated by using the following formula

$$\mathrm{NNP\:=\:GNP\:Depreciation}$$

In other words, NNP is equivalent to GNP which indicates the total yearly output minus the amount of GNP required to purchase or maintain existing goods that are also known as depreciation.

NNP usually indicates the nation’s success in continuing the production output. It is therefore useful to track an economy because it considers the output provided by all citizens of a country irrespective of their location. It also acknowledges the fact that capital must be spent to keep production standards high.

The NNP is expressed in the local currency value. For India, therefore, the value of NNP will be expressed in Indian Rupees. The value of NNP is usually extrapolated from the value of GNP by deducting the value of depreciation from it.

Calculating Net National Product (NNP)

The formula for NNP is

$$\mathrm{NNP\:=\:MVFG\:+\:MVFS\:-\:Depreciation}$$

Where

MVFS = market value of finished services.

MVFG = market value of finished goods

Alternatively, NNP can also be calculated as −

$$\mathrm{NNP\:=\:Gross\:National\:Product\:-\:Depreciation}$$

For example, if Country X produces $2 trillion worth of goods and $5 trillion worth of services in 2019, and the assets used to produce those goods and services are depreciated by $1 trillion, using the formula above, Country X's NNP in 2019 is

$$\mathrm{NNP\:=\:$2\:trillion\:+\:$5\:trillon\:-\:$1\:trillion\:=\:$6\:trillion}$$

Recording Depreciation in NNP

Depreciation, also known as capital consumption allowance (CCA), is a major component in the calculation of NNP. CCA is an indicator of the need for the replacement of certain assets to maintain the level of national productivity. It is further divided into two categories: physical capital and human capital.

Physical capital refers to machinery, real estate, or other tangible resources that may be needed to produce goods and services. Human capital, on the other hand, refers to the human skills, education, and other intangible assets that contribute to the production of goods and services.

The depreciation of physical and human capital occurs in different manners. While physical capital suffers from physical wear and tear that leads to erosion of its value, human capital depreciates through workforce turnover - companies need to spend money to find new employees when staff leave.

Notable considerations

Products made overseas

In the case of NNP, foreign-made products are included in its calculation. NNP includes the value of all goods and services produced by a country’s citizens without any regard for geographical barriers. However, this is not the case with GDP and NDP. GDP and NDP constrain the calculation within the countries’ geographic borders.

Application in Environmental Economics

NNP can be applied in environmental economics where certain natural resources deplete and it can be used to determine the activities that are sustainable in a particular environment.

Key Takeaways

• The net national product refers to the total market value of finished goods and services that are produced by both domestic and foreign citizens of a nation.

• When we talk about NNP we observe the market value of finished goods and services.

• The value of NNP can be obtained by subtracting the value of depreciation from the Gross National Product of a nation.

• As NNP indicates the consumption of a nation, it is considered one of the key indicators of the growth of an economy.

• When the value of NNP declines, businesses usually tend to move to industries that are considered recession-proof.

• When the value of NNP rises, businesses tend to move to consumer-led industries, such as travel and tourism.

• The NNP can be calculated by using the following formula $\mathrm{NNP\:=\:GNP\:-\:Depreciation}$

• NNP usually indicates the nation’s success in continuing the production output.

• NNP also acknowledges the fact that capital must be spent to keep production standards high.

• The NNP is expressed in the local currency value. For India, therefore, the value of NNP will be expressed in Indian Rupees.

• Depreciation, also known as capital consumption allowance (CCA) is a major component in the calculation of NNP.

• CCA is an indicator of the need for the replacement of certain assets to maintain the level of national productivity.

• CCA is further divided into two categories: physical capital and human capital.

• Physical capital refers to machinery, real estate, or other tangible resources that may be needed to produce goods and services.

• Human capital, on the other hand, refers to the human skills, education, and other intangible assets that contribute to the production of goods and services.

Conclusion

NNP is one of the key measures of the growth of an economy. It also helps to understand the value of depreciation of assets while the production of goods and services goes on. As it shows the increase or decrease in total output of production, it must be considered by all as an important measure of a nation’s economic progress.

FAQs

1. What is meant by NNP? Discuss in brief.

The net national product refers to the total market value of finished goods and services that are produced by both domestic and foreign citizens of a nation. When we talk about NNP we observe the market value of finished goods and services.

2. How can NNP be calculated?

The value of NNP can be obtained by subtracting the value of depreciation from the Gross National Product of a nation.

3. What is meant by human capital in the calculation of depreciation in the case of NNP measurement?

Human capital refers to the human skills, education, and other intangible assets that contribute to the production of goods and services.