GDP- GDP is one of the most common acronyms used to analyze a country's financial standing. GDP stands for Gross Domestic Product. GDP can be measured in three ways, which all lead to the same result. It is measured by taking into account the market value of all goods produced within a certain country within a certain period of time (usually a year); it is equal to the accumulation of all profits after various stages of production, adding taxes but subtracting subsidies; and it is also equal to the sum of income generated from production. The United States' GDP is currently around $16.24 trillion. This type of GDP is the most common, and known as nominal GDP; however, there is also constant or real GDP, which adjusts for price changes.
GNP- GNP is also very common; GNP stands for Gross National Product. Gross National Product adds net income, but subtracts total payment outflow to foreign assets. GNP is measured by considering the price of all production and services within a country, as well as production and services controlled by the country but on foreign lands. The difference between GDP and GNP is where the money being counted comes from. GDP takes into account any profits made inside the country's borders- regardless of the nationality of the worker. GNP takes into account profits made from any resident of the country, regardless of where he or she lives.
PPP- PPP, or purchasing power parity, is used to determine the worth of a specific currency. It is based on the concept of the law of one price, or how much everything in the world would cost if we used one currency. This is useful in establishing an appropriate currency exchange rate between two countries. Usually, the actual exchange rates do end up following the PPP exchange rates, so it helps to know possible future exchange rates. A really interesting example of how some people consider the differences in currencies is the Big Mac Index. The Big Mac Index compares the price around the world of- you guessed it- Big Macs! Personally, I find this to be hilarious. You are examining currencies based on the price of a cheeseburger!!! Unfortunately, the Big Mac Index is faulty when a country has to lower the price of the cheeseburger in order to increase competitiveness. Oh well, it is still pretty awesome. Anyways, back to PPP as a whole, PPP is difficult to measure because of the popularity of certain goods. For example, the United States consumes an excess of bread (thanks, carbohydrate lovers) whereas China consumes more rice. This is not just a stereotype; it is factually correct. Therefore, PPP would have to take into consideration these differences in demand. PPP relates to GDP because GDP is usually measured with the global currency- the dollar. If the PPP of the Japanese yen is reduced by 1/4th compared to the dollar, then the GDP of Japan will also be reduced by 1/4th. This does not make Japan any worse off- it still has the same amount of money- it is just measured differently.
All in all, GDP, GNP, and PPP are common terms. Thanks for the request, Josh Elkin! Any other requests are welcomed in the comments section! #makingdollarsandsense
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