A country's gross domestic product (GDP) is similar to its gross national product (GNP), except that GDP excludes net income from foreign sources. Like GNP, GDP is a measure of the value of a country's production of goods and services for a specific period, usually one year. Comparisons of GDP or GNP from year to year, when measured in constant dollars, indicate changes in a country's overall production and the direction of its economy. In general, economic policy makers look to the size and growth of the GNP or GDP as an indication of the well-being of the country's economy.

In the United States the GDP has replaced the GNP as the principal measure of domestic production, because it excludes foreign sources of income. It measures the output of labor and capital within the United States, while the GNP measures the output supplied by U.S. residents regardless of where they work and live. The GDP is reported at an annual rate every quarter by the U.S. Department of Commerce's Bureau of Economic Analysis. That is, the quarterly figures represent what the GDP would have been for the year had the same rate of production continued for the entire year. In addition, the quarterly figures are subject to a series of revisions until a "final revision" is made by the BEA. Analysts look to the quarterly figures for information on the direction of the economy.

As reported by the U.S. Bureau of Economic Analysis in Survey of Current Business, the United States' GDP is calculated as the sum of the four components of aggregate demand: consumption, investment, government purchases, and net exports. Personal consumption expenditures are broken out for durable goods, nondurable goods, and services. Gross private domestic investment includes fixed investment and changes in business inventories. Net exports include the value of all goods produced in the United States but sold abroad, minus the value of goods produced abroad and imported into the United States. Government purchases are reported for federal, state, and local governments. All government purchases are considered as final purchases for the purpose of calculating the GDP.

Once the GDP has been calculated, the Bureau of Economic Analysis obtains the nation's GNP by adding all receipts of factor income from the rest of the world and subtracting payments of factor income to the rest of the world. Factor income refers to income received by various factors involved in the production of goods and services, such as employees, business owners, and investors. Factor income from the rest of the world consists largely of receipts by American residents of interest and dividends and reinvested earnings of foreign affiliates of American corporations. Payments of factor income to the rest of the world consist largely of payments to foreign residents of interest and dividends and reinvested earnings of American affiliates of foreign corporations.

[ David P. Bianco ]


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