Both GDP and GNP are measured per capita to provide a picture of a country’s economic development. To see the relationship between a country’s export company and local economy, GDP (or Gross Domestic Product) can be directly compared to GNP (or Gross National Product). The GDP of a region is one way to measure the size of its local economy, whereas the GNP measures a country’s overall economic strength. These numbers can also be used to examine the distribution of wealth in a community or an individual’s average purchasing power in a country.
An rise in a country’s exports will result in an increase in the country’s GDP and GNP. As a result, an increase in imports will reduce GDP and GNP. However, an increase in exports may occasionally result in an increase in GDP rather than GNP. The exact relationship will be determined by the company’s nationality status while exporting or importing. For example, if Microsoft Corporation has a 100 percent owned subsidiary in India and that office exports US$2 billion in services out of India, that office will contribute US$2 billion to India’s GDP. However, because the export is done by a US corporation rather than an Indian company, it will not be included in the GNP number.
Criticism
GDP is likely the most extensively used metric for assessing economic health. However, some economists contend that GDP is a poor indicator because it does not account for societal economic well-being. It’s possible, for example, that GDP rises while median income falls and the poverty rate rises. GDP does not account for the environmental impact of expansion, nor does it account for long-term sustainability. Other key indicators include population health, infant mortality rates, and malnutrition rates, which are not reflected by GDP.
In this video, Nobel Laureate Joseph Stiglitz criticizes GDP. And at about the 4:45 mark, he talks about the difference between GDP and GNP:
According to Stiglitz, GDP began to displace GNP as the key indicator of economic success around 1990. GNP, he claims, is a measure of people’s income within a country, but GDP is a measure of the country’s economic activity. If economic activity takes place in a country but the income generated by such activity goes to foreigners, it is still counted in GDP but not in GNP. He uses the example of privatized mining as an illustration. The state often receives a 1-2 percent royalty, but the profits from privatized, foreign-owned mines go primarily to stockholders. (For more on GDP Fetishism, check Stiglitz’s paper.)
Social Progress Index
The Social Progress Index was created to track non-economic markers of happiness such as literacy rates, child mortality rates, shelter, and water access, among other things. SPI data was plotted against per capita GDP by The Economist to discover whether nations are “punching above their weight” in terms of social advancement.
Y = C + I + G + X + Z
- Net Income (Z) (Net income inflow from abroad minus net income outflow to foreign countries)
The production of physical commodities such as automobiles, agricultural products, machinery, and other machinery, as well as the provision of services such as healthcare, business consulting, and education, are all included in the Gross National Product. Taxes and depreciation are included in GNP. Because the cost of services utilized in the production of items is included in the cost of finished goods, it is not computed separately.
To produce real GNP, Gross National Product must be adjusted for inflation for year-to-year comparisons. GNP is also expressed per capita for country-to-country comparisons. There are challenges in accounting for dual citizenship when computing GNP. If a producer or manufacturer is a dual citizen of two nations, his productive output will be considered by both countries, resulting in double counting.
Importance of GNP
The Gross National Product (GNP) is one of the most important economic statistics used by policymakers. GNP provides vital data on manufacturing, savings, investments, employment, significant company production outputs, and other economic indicators. This data is used by policymakers to create policy papers that legislators use to pass laws. GNP data is used by economists to solve national issues such as inflation and poverty.
GNP becomes a more trustworthy statistic than GDP when assessing the amount of income earned by a country’s citizens independent of their location. Individuals in the globalized economy have various options for earning money, both domestically and internationally. GNP gives information that other productivity measurements do not incorporate when measuring such wide data. GNP would be equal to GDP if people of a country were limited to domestic sources of income, and it would be less valuable to the government and policymakers.
GNP information is also useful for examining the balance of payments. The difference between a country’s exports to foreign countries and the value of the items and services imported determines the balance of payments. When a country has a balance of payments deficit, it indicates it imports more goods and services than it exports. A surplus in the balance of payments indicates that the value of the country’s exports exceeds the value of its imports.
GNP vs. GDP
The market value of items and services produced in the economy is measured by both the Gross National Product (GNP) and the Gross Domestic Product (GDP). GDP reflects domestic levels of production, whereas GNP measures the level of output of a country’s population regardless of their location. The distinction arises from the fact that there may be many domestic enterprises that manufacture things for export, as well as foreign-owned companies that manufacture goods within the country.
GNP exceeds GDP when the income earned by domestic enterprises in foreign nations exceeds the income earned by foreign firms within the country. Because of the large number of manufacturing activities carried out by American people in other nations, the United States’ GNP is $250 billion more than its GDP.
The most common method for measuring economic activity in a country is to use GDP. Until 1991, the United States utilized Gross National Product as its primary indicator of economic activity. The Bureau of Economic Analysis (BEA) recognized that GDP was a more convenient economic indicator of total economic activity in the United States while making the changes.
The Gross National Product (GNP) is a valuable economic measure, particularly for determining a country’s income from international commerce. When appraising a country’s economic net worth, both economic indicators should be included in order to obtain an accurate picture of the economy.
Gross National Income (GNI)
Large institutions such as the European Union (EU), the World Bank, and the Human Development Index employ Gross National Income (GNI) instead of Gross National Product (HDI). GDP + net revenue from abroad, plus net taxes and subsidies receivable from abroad, is the definition.
The Gross National Income (GNI) is a metric that evaluates how much money a country’s inhabitants make from domestic and international trade. Despite the fact that GNI and GNP serve the same goal, GNI is thought to be a better measure of income than production.
Is it usually the case that GDP exceeds GNP?
- Gross national product (GNP) is an economic metric that combines GDP with any money made by residents from abroad investments, minus income earned by foreign residents in the domestic economy.
- As a result, depending on the type of manufacturing carried out in the country, net factor income from overseas may be positive or negative.
- The gross national product (GNP) is an estimate of the total worth of all final products and services produced by the means of production held by a country’s people in a particular period.
- The worth of a country’s finished domestic goods and services over a certain time period is measured by its gross domestic product (GDP).
- While GDP confines its interpretation of the economy to the country’s physical borders, GNP broadens it to include the country’s nationals’ net foreign economic activities.
- When a country receives a considerable amount of foreign investment, GDP exceeds GNP because many of the country’s production components are held by foreign nationals.
Is GNP beneficial or harmful?
The President announced in his news conference that there would be positive economic news the next day, with that peculiar, compassionate glint in his eyes. The good news turned out to be the revised GNP number for the fourth quarter of 1987, which showed a 4.5 percent growth rate. That should be cause for celebration, with a soaring stock market and thanks to the ruling party.
The GNP is scrutinized more than any other indicator of national success, including Olympic medals, unemployment rates, and high-school SAT scores. Economists have predicted it. It is revised and polished by government statisticians. It is so critical that not only Presidents, but also prime-time newscasters routinely notify us the day before a new GNP figure is revealed.
So, what exactly is GNP stand for? What does this imply? Why should we rejoice when it rises? I’m curious how many Americans can answer any of those questions, particularly the last one.
Gross National Product (GNP) is a term that refers to the total value of a country’ It refers to the total dollar worth of all final goods and services purchased by consumers, the government, and investors in the United States.
It’s nearly impossible to conceive about the GNP since it involves such a convoluted mix of apples and oranges, consultants and computers, ATVs and doctor’s fees. On the level of our daily dealings, I find it easier to comprehend. Here are a few instances of the various types of economic activity that the GNP represents, as well as the absurdity of classifying every increase as good and every decrease as negative.
Let’s say a couple gets divorced and pays a substantial cost to a lawyer (GNP up, good). The kids now alternate between his and her homes, necessitating full sets of bedroom furnishings, toys, and clothing in each locations (up, good). Cooking for herself is too sad for her, so she starts eating fast food (GNP up, good). Instead of hiring someone to repair up the house, he spends his leisure time doing it himself (GNP down, bad).
When a new lightbulb hits the market that uses half as much electricity as the previous one, everyone’s electric bill falls down (GNP down, bad).
When a city reduces its usage of salt on winter roads (down, bad), cars live two years longer before rusting out and needing to be replaced (down, bad). However, as the number of accidents rises, so do the costs of repairing cars and people (up, good).
A community issues a $30 million bond to fund the construction of a trash incinerator, which doubles the cost of waste disposal. As a result of the new air quality requirements, more money will be spent on scrubbers. The town becomes entangled in a legal battle over the plant’s harmful ash disposal (up, up, up, good, good, good).
The government is cutting back on roadway upkeep (down, bad). It continues to produce nuclear weapons (up, good). It provides Congress a significant increase (up, good). It gets rid of half of its paperwork (down, bad).
The Gross Domestic Product (GDP) is clearly not a measure of progress. It is a monetary flow, effort, and expense metric. It’s been dubbed the “fever chart of our consumption” by Wendell Berry. It is indiscriminate in its application. It mixes joys and sorrows, triumphs and disasters, profundities and trivialities, everything that costs money and nothing that doesn’t into one category.
Only if we pay to clean it up does the GNP quantify environmental damage. It is unaffected by the gardens we tend, the cooking, repairs, or cleaning we undertake for ourselves. There is no information regarding justice in the GNP. It doesn’t say whether the number of homeless families has risen, or whether the number of families with second houses has increased.
An growth in GNP is only beneficial in the sense that when money is spent, someone receives it, and that person is usually pleased. Who spent it, who got it, what it bought, and what portions of the transaction were not accounted for determine if it is beneficial in the larger, societal sense. GNP’s insufficiency as a measure of welfare is well known among economists, who call it out in every macroeconomics course. But, like many Presidents, many economists forget the caveats and become cheerleaders, wanting the GNP to rise and contributing to the national illusion that a larger economy is a better one.
The issue is that this delusion has come to dominate economic policy. When GNP growth is great, we presume no changes are required; when it is low, we resort to drastic measures. We risk creating GNP instead of what we actually want health, education, security, a clean environment, and jobs with dignity if GNP is our sole powerful indicator. Those objectives must be more significant than simply continuing to increase.
Instead of applauding when we learn that the GDP has increased, we should inquire as to what has increased, for whom, at what cost, and at whose price. Even better, we should endeavor to build national progress measures that more properly represent our true values and well-being.
P.S. An astute tax preparer in Norwich, Vermont, has rectified my tax column from last week. I left out the $1900 personal exemption for Fred the carpenter. As a result, his income tax in 1987 is $312, down from $425 in 1986. (I’ll inform Fred of the wonderful news.) I apologize for the oversight; the new income tax code is both more fair and more complicated than I anticipated. My observations about the injustice of the social security tax remain valid.
What is the difference between GDP and GNP?
Although both GDP and GNP conceptually represent the entire market value of all products and services produced during a given period, they differ in how they define the economy’s scope. GDP is a metric that represents the value of products and services generated inside the country’s geographical limits by both Americans and people from other countries. Only U.S. inhabitants produce goods and services, both locally and internationally, as measured by GNP.
The switch from GNP to GDP reflected a more appropriate measure of aggregate production in the United States, especially for short-term economic monitoring and analysis. For a variety of reasons, shifting to this as the primary measure of productivity proved beneficial. In the System of National Accounts, a set of worldwide principles for economic accounting, GDP was the fundamental measure of production. Many other countries had adopted GDP as their main indicator, making cross-national comparisons of economic activity more reliable. It also included other economic indices like employment and productivity in a consistent manner. Furthermore, problems with underlying source data for certain income estimates made quantifying GNP difficult. GNP, on the other hand, is a significant and important aggregate, proving particularly valuable for assessments of income sources and uses.
What happens if GDP is higher than GNP?
Consider a country where the gross national product is higher than the gross domestic product. This means that the country’s citizens, firms, and corporations are bringing in net inflows through their international operations. As a result, a higher GNP could indicate that a country is expanding its foreign financial operations, trade, or production.
What if GNP falls short of GDP?
GNP and GDP both reflect an economy’s national output and income. The primary distinction is that GNP (Gross National Product) includes net foreign income receipts.
- GDP (Gross Domestic Product) is a measure of a country’s output (national income + national output + national expenditure).
- GDP + net property income from abroad = GNP (Gross National Product). Dividends, interest, and profit are all included in this net income from abroad.
- The value of all goods and services produced by nationals whether in the country or not is included in GNI (Gross National Income).
Example of how GNP is different to GDP
If a Japanese multinational manufactures automobiles in the United Kingdom, this manufacturing will be counted as part of the country’s GDP. However, if a Japanese company returns 50 million in profits back to its stockholders in Japan, this profit outflow is deducted from GNP. The profit that is going back to Japan does not assist UK citizens.
If a UK corporation makes a profit from foreign insurance companies and distributes that profit to UK citizens, the net income from overseas assets is added to UK GDP.
It’s worth noting that if a Japanese company invests in the UK, it will still result in higher GNP because certain domestic workers will be paid more. GNP, on the other hand, will not grow at the same rate as GDP.
- GNP and GDP will be extremely similar if a country’s inflows and outflows of revenue from assets are identical.
- GNP, on the other hand, will be lower than GDP if a country has many multinationals that repatriate profits from local output.
Ireland, for example, has seen tremendous international investment. As a result, the profits of these international corporations result in a net outflow of income for Ireland. As a result, Ireland’s GNP is smaller than its GDP.
GNI
GNI (Gross National Income) is calculated in the same way as GNP. GNI is defined by the World Bank as
“The sum of all resident producers’ value added plus any product taxes (minus subsidies) not included in the valuation of output, plus net receipts of primary income (compensation of employees and property income) from outside” (Source: World Bank)
Can GDP and GNP be equal?
To put it another way, GNP is a subset of GDP. While GDP confines its economic analysis to the country’s physical borders, GNP broadens it to include the net abroad economic activity carried out by its citizens. GNP is a measure of how much a country’s citizens contribute to its economy.
Why is GNP a poor indicator?
If we repeated this process for all of the products on our list, the total would be gross national disproduct. When the sum is compared to the aggregate of production as measured by GNP, it shows how far we’ve come in terms of social wellbeing. In fact, we’d have our wonderful “social” indication of what the country has accomplished if we could find a true “net” between disproduct and product.
The outcomes would almost certainly be disappointing. We’d probably discover that, while gratifying today’s human desires, we were also producing present and future desires to repair the damage caused by current manufacturing.
Conclusion:
GNP can only reflect the amount of money that society exchanges for commodities since it assesses the market value of final goods and services. As a result, many vital activities that have an impact on our standard of living are left out of the GNP calculation. We include benefits received from the government in GNP but not the expenditures of giving them, for example.
Another example is the social benefit of education but not the costs of obtaining it. As a result, one would be inclined to produce a more accurate assessment of economic output by include both negative and positive production contributions. However, the majority of economists disagree with this approach.
Definition of the GDP, GNP and growth rate
The GDP is the value of a country’s final products and services generated in a given year (Mankiw 2001: 522). This figure is usually expressed in US dollars and represents the sum of all official revenue and profits, as well as total consumption, investment, government purchases, and net exports in a particular year. The distinction between GDP and GNP, or Gross National Product, is that the GNP quantifies the value created by a country’s population, regardless of where they reside or work. That is to say, a profit made by a British company in a developing country adds to the developing country’s GDP but not to its GNP; instead, it contributes to the GNP of the United Kingdom. The GNP is commonly referred to as GNI by the Worldbank (Gross National Income). The sum of both values is divided by the population of the relevant country to obtain the figure per capita, which is used to compare figures between countries. The growth rate expresses the percentage change in GDP or GNP from the previous year. Because the prices for the basis year are taken for both years, this rate is unaffected by inflation.
Advantages of the GDP / GNP
The GDP/GNP has the advantage of being a single statistic that contains a wealth of information about a country’s economy as well as its overall living level. The GNP per capita is more than just a measure of a country’s average wealth; countries with larger GNPs can usually afford better health care and education (Weltbank 2004: 41). They usually live longer, have better access to clean water, and have a lower child mortality rate. They usually perform better in all of these types of tests. To recap, there is a substantial relationship between a country’s GNP and its progress. Furthermore, the GDP/GNP is a widely accepted and available metric for almost all countries. It’s no surprise, then, that the GNP/GDP ratio is the most commonly used metric in organizations like the IMF and the World Bank.
Preconditions for the use of GDP / GNP
When using the GDP or GNP, there are a few prerequisites that must be met in order to obtain useful information. The GNP is substantially better than the GDP in terms of measuring a country’s development. The difference between a developed country’s GDP and its GNP is usually fairly minor. It is frequently highly crucial for underdeveloped countries. According to Worldbank data, the overall GDP of the least developed countries, as defined by the United Nations, is about 6% larger than their GNP. In Sub-Saharan Africa, the disparity is significantly greater, at more than 20%. (Worldbank Data & Statistics). It is self-evident that the profits made by western firms from their facilities in developing countries do not help to the people’s living standards in such countries. Another issue is that you can’t just compare the worth of a dollar in one country to the value of a dollar in the United States. Angola, for example, has a larger purchasing power than the United States. You must utilize GNP data that have been converted to purchasing power parity to solve this problem. This takes into account the pricing differences between countries. Another issue is the rate of growth. Although it provides a useful indication of a country’s progress over the previous year, it is important to remember that a poor country with high growth rates is not always better than a rich country with moderate growth rates, as growth is always related to the basis. Even with all of these factors in mind, the value of the GNP and GDP as a development indicator is severely limited by the following issues. I’ll usually refer to the GNP per capita after buying power parity in the following, but the same issues apply to the GDP as well.
Why is GNP not a good indicator of poverty?
While GNP is usually used to assess productivity, it is also commonly used to gauge a country’s welfare. Growth in real GDP is interpreted as a rise in living standards. Unfortunately, the Gross National Product (GNP) is not a perfect measure of social wellbeing and even has limitations when it comes to assessing economic activity. It’s tough to quantify increases in productivity and product quality. Personal computers, for example, have come down in price substantially since their inception, while their capabilities have vastly improved.