The Economic Way of Thinking 13th Edition by David Prychitko, Peter Boettke, Paul Heyne

Exercise 7

At the end of 1991, the Bureau of Economic Analysis fell in line with the standard practice in most other countries, and changed its comprehensive measure of national income and output from GNP to gross domestic product. To obtain the GDP from the GNP, one subtracts income received from the rest of the world and adds income paid to the rest of the world. For example, an American owns stock in a British corporation and receives dividends. Although this is a part of American income, it was not generated in the United States and really should not be counted as a part of domestic U.S. product. So it is subtracted from total U.S. income to obtain the gross domestic product. Meanwhile, of course, income payments to foreigners who have invested in the United States, which are excluded from the GNP, must be included in the gross domestic product, because they are the income counterpart to goods produced in the United States. In every year between 1960 and 1976, U.S. GNP was larger than GDP. In every year from 1983 to 1998, GDP was larger than GNP. What does this imply? Should it be a matter for concern?