What is the difference between gdp and gnp

Difference Between GDP and GNP

April 22, 2011 Posted by Olivia

GDP vs GNP

If you watch economic news regularly, you must have come across words like GDP and GNP. These are measures of economic activities in any country. GDP stands for Gross Domestic Product and GNP refers to Gross National Product. They both seem to be similar, right? Wrong. Had they been same, they would not have existed together. People are often confused by the difference between GDP and GNP and this article will explain the differences between the two to make a clearer understanding.

GDP is defined as the total value of all the goods and services produced within a country in a given period of time which is usually taken a calendar year. It is calculated in the following manner.

GDP= consumption+ investment+ government spending+ (exports- imports).

GNP on the other hand is the gross national product which is a figure obtained by adding all the income generated by nationals of the country made within or outside the country to the GDP.

Thus the major difference between GDP and GNP is that while GDP takes into account income generated within the country, GNP takes into account income generated by the nationals, whether they are within the country or residing outside the country. The two factors of location and ownership are important to understanding GDP and GNP. If we are talking about the US, if there is an output that takes place within the US irrespective of the ownership, it is included in its GDP. On the other hand, GNP calculates economic output based upon ownership. This is why it takes into account output generated by American companies operating outside the US.

Let us understand the difference by taking up examples. Honda is a Japanese company that has a huge automotive plant in Ohio. The output from this plant is taken into consideration while calculating the GDP of US, but when it comes to GNP which is based upon the concept of ownership, its output is not taken into consideration. Conversely Ford is an American company having a plant in Mexico. As GNP is based upon ownership, its output is included in GNP but when calculating GDP, the output of this Mexican plant is ignored.

Hope this article helped in removing the confusion.

Difference between GDP and GNP

• GDP and GNP are measure of economic development of a nation

• GDP is Gross Domestic Product, while GNP is Gross National Product

• While GDP is location based, GNP is based upon ownership

GDP vs. GNP: What’s the Difference?

GDP vs. GNP: An Overview

GDP and GNP are two of the most commonly used measures of a country’s economy. Both represent the total market value of all goods and services produced over a certain period. However, they are calculated in slightly different ways.

Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation’s borders. On the other hand, gross national product (GNP) is the value of all finished goods and services owned by a country’s citizens, whether or not those goods are produced in that country.

These metrics reflect different ways of measuring the scope of an economy. While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals.

Key Takeaways

Explaining GDP Vs. GNP

Gross Domestic Product (GDP)

Gross domestic product is the most basic indicator to measure the overall health and size of a country’s economy. This metric counts the overall market value of the goods and services produced domestically by a country. GDP is an important figure because it gives an idea of whether the economy is growing or contracting.

Calculating GDP includes adding together private consumption or consumer spending, government spending, capital spending by businesses, and net exports—exports minus imports. Here’s a brief overview of each component:

Because it is subject to pressures from inflation, GDP can be broken up into two categories—real GDP and nominal GDP. A country’s real GDP is the economic output after inflation is factored in, while nominal GDP does not take inflation into account. Nominal GDP is usually higher than real GDP because inflation is almost always positive.

Nominal GDP is generally used to compare different quarters in the same year because inflation will usually not be a significant factor. The GDPs of two or more years are compared using real GDP.

GDP can be used to compare the performance of two or more economies, acting as a key input for making investment decisions. It also helps the government draft policies to drive local economic growth.

The United States has used GDP as its key economic metric since 1991; it replaced GNP to measure economic activity because GDP was the most common measure used internationally.

When the GDP rises, it means the economy is growing. Conversely, if it drops, the economy is shrinking and may be in trouble. But if the economy grows to the point of reaching full production capacity, inflation may start to rise. Central banks may then step in, tightening their monetary policies to slow down growth. When interest rates rise, consumer and corporate confidence drops. During these periods, monetary policy is eased to stimulate growth.

Gross National Product (GNP)

Gross national product is another metric used to measure a country’s economic output. Where GDP looks at the value of goods and services produced within a country’s borders, GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.

While GDP is an indicator of the local/national economy, GNP represents how its nationals are contributing to the country’s economy. It factors in citizenship but overlooks location. For that reason, it’s important to note that GNP does not include the output of foreign residents.

The 1993 System of National Accounts replaced the term GNP with GNI, or Gross National Income. Both metrics measure the same thing, domestic productivity plus net income by a country’s citizens from foreign sources.

For example, a U.S.-based Canadian NFL player who sends their income home to Canada, or a German investor who transfers their dividend income to Germany, will both be excluded from the U.S. GNP, but they will be included in the country’s GDP.

GNP can be calculated by adding consumption, government spending, capital spending by businesses, net exports (exports minus imports), and net income by domestic residents and businesses from overseas investments. This figure is then subtracted from the net income earned by foreign residents and businesses from domestic investment.

Examples of GDP and GNP

A quick look at the absolute GDP and GNP numbers of a particular country over the past two years indicates they mostly move in sync. There is a small difference between GDP and GNP figures of a particular country depending upon how the economic activities of the nation are spread across the world.

(All Figures in Billions of USD)

Data Sources: World Bank DataBank.

For instance, many American businesses, entrepreneurs, service providers, and individuals who operate across the globe have helped the nation secure a positive net inflow from overseas economic activities and assets. This bumps up U.S. GNP, making it higher than the GDP of the U.S. for the year 2021.

Saudi Arabia is another instance of a country where GNP is higher than GDP. The Kingdom is a major oil exporter with enterprises and businesses spread around the globe. The income from these enterprises tends to be higher than the income lost due to foreign citizens and businesses operating in Saudi Arabia.

Other nations like China, the U.K., India, and Israel have lower GNP compared to corresponding GDP figures. This indicates these nations are seeing a net overall outflow from the country. Citizens and businesses of these countries operating overseas are generating lesser income compared to the income generated by the foreign citizens and businesses operating in these countries.

The percentage figures in the table above (GNP/GDP-%), which represents GNP as a percentage of GDP, indicate that the absolute difference between the two figures is usually confined within a range of plus or minus 2%. Hong Kong is a notable exception to this rule: as a highly export-oriented economy, many of the city’s business operations are located overseas.

When Is GNP More Useful Than GDP?

Gross National Product, or Gross National Income, records the net income from foreign sources owned by a country’s citizens. This metric may be useful to scholars measuring the effect of overseas businesses or remote workers on a country’s economy.

What Is the Difference Between GNP and GNI?

The 1993 System of National Accounts replaced the term «Gross National Product,» or GNP, with the new term «Gross National Income,» or GNI. Both represent a country’s domestic output plus net income from the businesses or labor of a country’s citizens abroad.

Is GDP or GNP Better?

While there is no objective basis for saying that one metric is better than the other, Gross Domestic Product is the most popular metric for the overall productivity of a country’s economy. GNP was formerly the default measure for a country’s economic production but it fell out of favor by the 1990s.

The Bottom Line

Gross National Product and Gross Domestic Product are among the most popular metrics for the productivity of a country’s economy. Both measure the value of a country’s economic activity. The main difference is that GDP measures productivity within a country’s geographical boundaries and GNP records economic activity by that country’s citizens and businesses, regardless of location. Although GDP tends to be the more popular of the two, their values tend to be about equal.

GDP vs GNP – All You Need To Know

Gross Domestic Product (GDP) and Gross National Product (GNP) are important measures that define the health of the economy. GDP defines the total value of the goods and services that a country produces. On the other hand, GNP defines the total value of goods and services that the residents of a country produce irrespective of where they reside. Even though both terms convey similar things, they are very different. However, people often use them interchangeably when talking about the economic health of a country. To better understand what both these terms mean and convey, we must know the differences between GDP vs GNP.

GDP vs GNP – Differences

Following are the differences between GDP vs GNP:

Meaning

To understand the activities, production, and output taking place within the country, we use the Gross Domestic Product. It considers all economic activities within the country, including from residents of other countries.

On the other hand, GNP takes into account GDP value along with the value of economic activities of expatriates and citizens outside of the country. In simple terms, GNP is the total of all economic activities by citizens of the country irrespective of the country they are living in. Thus, economic activity inside and outside the country becomes a major point of difference between GDP vs GNP.

Fundamentals

The core concept of GDP revolves around location. For GNP, it is basically citizenship. Similarly, GDP talks about productivity at a country scale, while GNP includes productivity at the international level.

Who are Included?

GDP includes all economic activities inside the country by nationals and foreigners. On the other hand, GNP includes production and services by citizens of a country.

Excludes

GDP does not consider the economic activities of the citizens outside the country. On the other hand, GNP does not consider economic activities by foreigners within the country.

Calculation

Following is the formula for calculating Gross Domestic Product:

Gross Domestic Product = Private Consumption Gross Investment (C) + Government Investment (I) + Government Spending (G) + (Exports (X) –Imports (M))

Since Gross National Product takes into account the value of economic activities of those who are not residents of the country as well, the formula for the same is:

Gross National Product (GNP) = GDP + Net Income Property from abroad

For instance, if a US company manufactures automobiles in the United Kingdom, the production will add to the UK GDP. But, if the US firm takes the profit and sends it to the shareholders in the US, then the amount will come in the US GNP as United Kingdom residents won’t benefit from this profit.

Context of Calculation

The gross domestic product helps us understand the country’s overall economic health. On the other hand, economists use the gross national product to know how the nationals of the country are doing and what their economic status is. Governments and economists use the GNP to gauge the contribution of the residents to the economy.

Difference in Treatment of Certain Items

There are different situations or items that are treated very differently in the calculation of Gross Domestic Product and Gross National Product. Let’s review each of such situations:

Net income receipts of foreign companies operating in the country– as said earlier, GNP considers the economic value of all economic activity by the citizens of the country. Receipt from foreign companies under the ownership of foreign residents does not qualify for the GNP. Gross domestic product or GDP, on the other hand, does include the economic output in the country irrespective of who owns the company operating in the country.
Domestic residents owning companies and producing goods for global consumption – assume a case where a mobile manufacturing company produces smartphones for global consumption and remits the profits to the countries that have liberal corporate tax policies. Gross national product, in this case, will include the economic activity or remittance of profit to other countries. On the other hand, GDP is the measure of the economic output of the nation’s economy and does not consider the international activity, including the money remitted to other countries.
Net income from the foreign investment – while calculating gross national product, net income receipts from the international investments by the residents are taken into account. Gross domestic product, on the other hand, does not include this income.

Application

GDP helps to measure the size of the local economy, while GNP reflects the overall economic strength of the country. One can use these measures to study the average purchasing power, distribution of wealth, and more.

Exports

Final Words

The gross domestic product holds more significance than the gross national product. The former metric gives a holistic picture of the total value of all economic activities in an economy. However, there is a criticism against GDP that it does not tell the economic well-being of society, such as the environmental impact of growth, infant mortality rates, and more.

Gross Domestic Product (GDP) vs. Gross National Product (GNP)

GDP (or Gross Domestic Product) and GNP (Gross National Product) measure the size and strength of an economy but are calculated and used in different ways.

Comparison chart

$11.5 Trillion in 2005).

Definitions

GDP Definition

GDP stands for Gross Domestic Product, the total worth estimated in currency values of a nation’s production in a given year, including service sector, research, and development. That translates to a sum of all industrial production, work, sales, business and service sector activity in the country. Usually this is calculated over a period of one year, but there may be analysis of short and long term trends to be used for economic forecast. Gross Domestic Product can also be calculated on a per capita (or per person) basis to give a relative example of the economic development of nations.

GNP Definition

GNP stands for Gross National Product. In general terms, GNP means the total of all business production and service sector industry in a country plus its gain on overseas investment. In some cases GNP will also be calculated by subtracting the capital gains of foreign nationals or companies earned domestically. Through GNP an accurate portrait of a nation’s yearly economy can be analyzed and studied for trends since GNP calculates the total income of all the nationals of a country. This gives a far more realistic picture than the income of foreign nationals in the country as it is more reliable and permanent in nature. Gross National Product can also be calculated on a per capita basis to demonstrate the consumer buying power of an individual from a particular country, and an estimate of average wealth, wages, and ownership distribution in a society.

Here is a video of economist Phil Holden explaining the difference between GNP and GDP and talking about how they are measured and how accurate they are.

Calculation

How GDP is calculated

GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.

The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + (government spending) + (exports – imports), or,

GDP = C + I + G + (X-M)

How GNP is calculated

There are various ways of calculating GNP numbers. The expenditure approach determines aggregate demand, or Gross National Expenditure, by summing consumption, investment, government expenditure and net exports. The income approach and the closely related output approach sum wages, rents,interest, profits, non income charges, and net foreign factor income earned. The three methods yield the same result because total expenditures on goods and services (GNE) is equal to the value of goods and services produced (GNP) which is equal to the total income paid to the factors that produced the goods and services (GNI).

Expenditure Approach to calculating GNP:GNP = GDP + NR (Net income from assets abroad (Net Income Receipts)).

Applications of GDP and GNP numbers

GDP and GNP figures are both calculated on a per capita basis to give a portrait of a country’s economic development. GDP (or Gross Domestic Product) may be compared directly with GNP (or Gross National Product), to see the relationship between a country’s export business and local economy. A region’s GDP is one of the ways of measuring the size of its local economy whereas the GNP measures the overall economic strength of a country. These figures can also be used to analyze the distribution of wealth throughout a society, or the average purchasing power of an individual in the country etc.

Increase in exports of a country will lead to increase in both GDP and GNP of the country. Correspondingly, increase in imports will decrease GDP and GNP. However, sometimes increase in exports might only lead to increase in GDP and not GNP. The exact relationship will depend on the nationality status of the company doing the export or import. E.g. if Microsoft Corporation has a 100% owned subsidiary in India, and that office exports US$2 Billion worth of services out of India, then US$2 Billion will be added to the GDP of India. However, it will not be added to the GNP figure since the export is done by a US company and not an Indian company.

Criticism

GDP is perhaps the most widely used metric to measure the health of economies. But some economists have argued that GDP is a flawed metric because it does not measure the economic well being of society. For example, it’s possible that GDP is going up but median income going down and poverty rate increasing. GDP also does not measure environmental impact of growth, nor sustainability. Other important metrics include health of the population, infant mortality rates, and malnutrition rates, none of which are captured by GDP.

Here’s Nobel laureate Joseph Stiglitz offering a criticism of GDP. And at about the 4:45 mark, he talks about the difference between GDP and GNP:

Stiglitz says that around 1990, GDP supplanted GNP as the primary measure of economic progress. He says that GNP measures the income of the people within the country whereas GDP measures economic activity in the country. If economic activity occurs in the country but the income from this activity accrues to foreigners, it will still be counted in GDP but not in GNP. He cites the example of privatized mining. Often the state gets a royalty of 1-2% but the income from privatized, foreign-owned mines accrues largely to shareholders. (Also see Stiglitz’s article: GDP Fetishism).

Social Progress Index

The Social Progress Index was designed to measure non-economic indicators of well-being such as literacy rates, child mortality rates, shelter, access to water etc. The Economist plotted SPI data against per capita GDP to see which countries are «punching above their weight» in terms of social progress.

The chart reveals interesting insights about the effect or correlation of GDP on well-being in society. In general, the higher the per capita GDP, the higher the SPI. This is represented by the red line that plots the «average» curve. Countries above the red line are those where social progress indicators are better than per capita GDP would suggest. For example, Iran and Costa Rica have similar per capita GDP. However, Costa Rica performs significantly better than Iran on measures of social progress. Another example contrasts Brazil and UAE. Both are similar in their SPI scores even though UAE has a significantly higher GDP per person.

Examples: U.S. and Ireland

References

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Difference Between GDP and GNP

Last updated on November 15, 2019 by Surbhi S

National Income implies the ultimate outcome of various economic activities of a country, conducted during given period, valued in monetary terms. It is the supreme macroeconomic variable that helps to gauge the economic soundness of the nation. Of different measures employed in the analysis of national income GDP and GNP are greatly used. GDP or otherwise called as gross domestic product delineates the sum total of the market value of all goods and services, produced within the geographical boundary of the nation in a given year.

On the other hand, Gross National Product or GNP is the aggregate market value of all goods and services created or produced during a particular period and net factor income from abroad.

There is a fight between the two measures, regarding which one is a better indicator of economic strength. The significant differences between GDP and GNP are discussed in this article excerpt. Have a look.

Content: GDP Vs GNP

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Definition of GDP

Gross Domestic Product or GDP, is the value of everything that is produced within the country’s domestic territory in a particular financial year. During the calculation of GDP, the primary focus is to capture the goods produced or services rendered within the nation’s border, whether the output is produced by the residents or non-residents of the country. The output produced outside the geographical boundaries of the country are not included in GDP.

GDP is an indicator of the size of the economy. It reflects the aggregate of consumption, investments, spending by the government and net export (export – import). In general, the GDP is calculated for one year. However, it can also be calculated for any term to forecast economic trends.

Definition of GNP

Gross National Product or GNP is the total market value of everything (i.e. goods and services) produced by the residents of the country during a particular accounting year.

GNP includes the income earned by the country’s nationals within and outside the country, but it excludes the income earned by the foreign citizens and companies within the country. You can understand the statement, through an example: There are many enterprises which are operating outside the country. Many citizens of a country work in another country. The income earned by all these persons is known as factor income earned from abroad.

Likewise, non-residents render factor services within the domestic territory of the country for which they earn income. When you deduct the factor income paid to non-residents for rendering services from factor income received from abroad, the result will be the Net Factor Income received from Abroad (NFIA).

To calculate GNP, you need, to sum up, GDP and NFIA (i.e. The income earned by the residents abroad less non-residents within the country).

Key Differences Between GDP and GNP

The major differences between GDP and GNP are explained in the given below points:

Video

Conclusion

The most important distinguishing point between these two is that while we calculate GDP, we take into consideration whatever is produced within the local borders of the country and so it includes the goods and services produced by the foreign nationals also but if we talk about GNP, only the production done by the country’s citizens is considered whether they are inside or outside the country and the contribution of foreign citizens are completely excluded.