Net National Product (NNP)

What Is Net National Product (NNP)?

Net national product (NNP) is the monetary value of finished goods and services produced by a country's citizens, overseas and domestically, in a given period. It is the equivalent of gross national product (GNP), the total value of a nation's annual output, minus the amount of GNP required to purchase new goods to maintain existing stock, otherwise known as depreciation.

Understanding Net National Product (NNP)

NNP is often examined on an annual basis as a way to measure a nation's success in continuing minimum production standards. It can be a useful method to keep track of an economy as it takes into account all its citizens, regardless of where they make their money, and acknowledges the fact that capital must be spent to keep production standards high.

The NNP is expressed in the currency of the nation it represents. That means that in the United States the NNP is expressed in dollars (USD), while for European Union (EU) member nations the NNP is expressed in euros (EUR).

The NNP can be extrapolated from the GNP by subtracting the depreciation of any assets. The depreciation figure is determined by assessing the loss of the value of assets attributed to normal use and aging.

The relationship between a nation's GNP and NNP is similar to the relationship between its gross domestic product (GDP) and net domestic product (NDP).

Calculating Net National Product (NNP)

The formula for NNP is:

NNP = MVFG + MVFS − Depreciation where: MVFG = market value of finished goods MVFS = market value of finished services \begin{aligned} &\text{NNP} = \text{MVFG} + \text{MVFS} - \text{Depreciation} \\ &\textbf{where:} \\ &\text{MVFG} = \text{market value of finished goods} \\ &\text{MVFS} = \text{market value of finished services} \\ \end{aligned} NNP=MVFG+MVFS−Depreciationwhere:MVFG=market value of finished goodsMVFS=market value of finished services

Alternatively, NNP can be calculated as:

NNP = Gross National Product − Depreciation \begin{aligned} &\text{NNP} = \text{Gross National Product} - \text{Depreciation} \\ \end{aligned} NNP=Gross National Product−Depreciation

For example, if Country A produces $1 trillion worth of goods and $3 trillion worth of services in 2018, and the assets used to produce those goods and services are depreciated by $500 billion, using the formula above, Country A's NNP is:

NNP = $ 1   trillion + $ 3   trillion − $ 0 . 5   trillion = $ 3 . 5   trillion \begin{aligned} \text{NNP} &= \$1 \ \text{trillion} + \$3 \ \text{trillion} - \$0.5 \ \text{trillion} \\ &= \$3.5 \ \text{trillion} \\ \end{aligned} NNP=$1 trillion+$3 trillion−$0.5 trillion=$3.5 trillion

Recording Depreciation 

Depreciation in the overall economy, also referred to as capital consumption allowance (CCA), is a key component when calculating a country's NNP. CCA is an indicator of the need to replace certain assets and resources to maintain a specified level of national productivity. It is divided into two categories: physical capital and human capital.

Physical capital can include real estate, machinery, or any other tangible resource used in the production of goods and services. Human capital, on the other hand, covers the skills, knowledge, and abilities of a workforce to produce goods and services, as well as the necessary training or education that may be required to maintain production standards. 

Physical capital and human capital depreciate in different ways. Physical capital experiences depreciation based on physical wear and tear, while human capital experiences depreciation based on workforce turnover — when staff leave, companies must spend more of their resources on training and finding new talent.

Special Considerations

Environmental Economics

NNP has particular usefulness for the field of environmental economics. NNP is a model associated with the depletion of natural resources, and it can be used to determine whether certain activities are sustainable within a particular environment.

Foreign-Made Products

As previously mentioned, NNP also factors in the value of goods and services produced overseas. That means that the activities of U.S. manufacturers in Asia, for example, count toward the U.S.' NNP.

That is not the case for GDP and NDP, which limit their interpretation of the economy to the geographical borders of the country.