GNP is defined in the as “the money value of all the final goods and services produced by the people living in a country for a period of one year. These goods are for example, rice, wheat, furniture, cars, etc. While the services are rendered by, for example, teachers, advocates, doctors etc. Hence we add up the money values of all these final goods and services produced in one year and thus come up with the Gross National Product of a country. Economists generally use expenditure approach to calculate GNP of a country. According to this approach following expenditures are added together to measure GNP.

Personal Consumption Expenditure is the total of expenditure of the people living in a country on consumer goods and services in period of one year e.g. annual personal consumption expenditure of the people on food, clothing and entertainment etc.

Gross Domestic Private Investment is the aggregate of all the investments made by the people in a country throughout the year e.g. on the construction of new factories, new shopping centers and new cinema houses etc.

Like the people, government also divides its expenditure in two parts as consumption expenditure and capital expenditure. The consumption or non-development expenditure of the government takes place in the following ways:

(1) Expenditure on the Purchase of goods and services from private business enterprises e.g. expenditure on the purchase of typewriters, official cars etc.
(2) Expenditure on Government Employees e.g. defense staff, administrators and secretariat staff etc.
(3) Government transfer payments or in other words unemployment allowances, pensions, scholarships etc.

The aggregate investment made by the government within a period of one year for the development of the country e.g. on the construction of new roads, new dams etc. is known as Gross Domestic Public Investment.

Now by adding up the expenditure under the above four items we will up with what is known as the Gross Domestic Product (G.D.P). This means that G.D.P. represents the total expenditure incurred on final goods and services produced in the country. G.D.P does not include the foreign sector and it is a part of G.N.P.

Therefore, in order to arrive at the G.D.P we have to include the following two items of the foreign sector with G.D.P.

Export surplus is the surplus obtained by deducing the value of imports from the value of exports of a country. Thus, the aggregate earning of a country through net exports is known as the export surplus, Hence, value of exports – value of imports (in one year) = Export Surplus or symbolically, X-M = Export surplus.

Net foreign investment is the difference between outgoing capital for investment and the incoming capital for investment. Payment for securities, bonds etc. is a part of incoming/outgoing capital for short term investment; whereas setting up of a factory in a foreign country will be part of incoming/outgoing capital for long term investment. The net foreign investment can either be positive or negative. It becomes a part of the GNP. because it either increases the aggregate of goods and services that are available to the people of a country in one year.

The aggregate of all the annual expenditure on the above six headings amount to the Gross National Product of a country. An important factor to be remembered when calculating the G.N.P. is that non-productive transactions do not form part of the GNP. These transactions are e.g. old age pensions and financial transactions like bonuses.