If a country has considerable income receipts or outlays from overseas, its GNI will deviate significantly from its GDP. Profits, employee remuneration, property income, and taxes are all examples of income items. For example, in a country with a large number of foreign enterprises, GNI is substantially lower than GDP since revenues repatriated to the country of origin are recorded against the country’s GNI but not against its GDP. For countries with high foreign receivables or outlays, GNI is a better measure of economic well-being than GDP.
Why is GNI per capita a better indicator of living standards than GDP?
Although numerous contributions have advised adopting different measures to assess people’s wellbeing in recent decades, the Gross Domestic Product has traditionally been the most widely accepted indication of an economy’s size and success (see Stiglitz, Sen, and Fitoussi 2008).
Because it captures incomes related to the mobility of factors of production (wages earned by cross-border workers, repatriated profits and dividends, etc.), the so-called Net Primary Incomes (NPI), in the Systems of National Accounts, the Gross National Income (GNI) is widely regarded as a better indicator to account for the income available to a country’s residents (see UN 2008 and IMF 2009).
GNI, on the other hand, excludes unilateral transfers such as foreign aid and, most notably, remittances, which are referred to as Net Secondary Incomes (NSI).
GNI accounts for cross-border workers’ earnings so-called employee compensation but not for remittances sent home by individuals who live and work abroad for more than a year, which account for the vast majority of remittances. Between 1990 and 2010 (according to the World Bank database), remittances surged by around sevenfold; they are now one of the most important sources of monetary inflows for many developing nations, and in extreme cases, they can account for up to 20% of GDP.
A third statistic, Gross National Disposable Income (GNDI), tracks unilateral transfers and covers both primary and secondary income distribution. The GNDI is a far better predictor of a country’s people’s living standards than the GNI, and it should be used instead of the latter in many circumstances.
The GNDI, on the other hand, isn’t easily found in major international reports and databases. GNDI is calculated by the OECD for its members as well as several non-member nations like China and Indonesia. Furthermore, GNDI is frequently mistaken with GNI in everyday usage (see for instance Todaro and Smith 2011, page 54).
Why is GNI not a good indicator of progress?
GNI per capita – this metric simply reflects economic development and has no bearing on whether a country’s citizens enjoy a high standard of living. It is also an average, therefore it conceals information about persons who are extremely wealthy or impoverished.
Is GNI a good indicator of progress?
No. Income is a means, not an end, to human growth. Only the average national income is reflected in GNI per capita. It doesn’t say how that money is spent or whether it leads to better health, education, or other aspects of human growth. In fact, comparing country rankings by GNI per capita and HDI can disclose a lot about the outcomes of national policy decisions. Equatorial Guinea, which has a GNI per capita of $13,944 (PPP$) but an HDI of 145, is virtually on par with Zambia, which has a GNI per capita of $3,326 (PPP$).
In terms of GNI, how do countries compare?
We can figure out how much foreign help or foreign labor a country receives by comparing its GDP and GNI. The gap between GDP and GNI in most nations is quite smallfor example, the United States’ GNI was only around 1.5 percent higher than its GDP in 2016.
What are the benefits of GNI?
Positives/Pros of GNI: Figures are easier to obtain than HDI values, and they can be compared on a yearly basis because governments normally provide population and national income data on a yearly basis.
Is HDI superior to GNI?
New wealth values and national economic growth data are required. GNP and GNI are no longer relevant.
The Human Development Index (HDI) is a far superior tool for comparing countries than GNP (gross national product) or GNI (gross national income), however it only provides a ranking on a development scale, not a dollar amount. Bhutan assesses its national situation, with the most important metrics being welfare and happiness.
GNP and GNI are benchmark metrics used by the World Bank and IMF to compare economic growth and development in different countries. These national total GNP figures are inaccurate. It is more rational to examine population growth per capita (GNI) and other metrics. However, compiling these other parameters is difficult.
The difference between imports and exports is used to determine GNP, which is estimated using three distinct methods. GNP figures are cited as if they are the most important indicators of a country’s economic development. Even if the situation is not especially social or democratic, a few billionaires and a bigger group of millionaires on the one hand, and many millions of people living in poverty on the other, like in India and China, can nonetheless yield a fair economic growth statistic. Furthermore, the gender gap is not included in the five items below.
Figures for total GNP are based on money flows that have been put together and converted to US dollars. These data need to be adjusted, and it’s past time for new figures to be established on a global scale that better reflect actual development. Here are five ideas to consider:
A. Inflation correction: If the US dollar remains steady and is not devalued, this adjustment works well. All economic numbers must be adjusted to account for inflation in the US dollar. All of these total GNP growth estimates will be exaggerated if they are not rectified. This will be akin to the depreciation of the one-dollar-per-day poverty limit.
B. Informal market: Governments do not evaluate the value of their informal market and do not include it in the total GNP calculation; no product added value is computed, and no taxes are raised on the informal market. Many of today’s high-growth countries were once underdeveloped countries with significant informal markets where large amounts of commodities and services were traded. Many self-supporting people, however, were classified as poor because they earned less than $500 per year. Many millions of subsistence farmers in Africa, South America, and Asia did not count as part of the economy fifty years ago, despite having an acceptable and sustainable standard of life. When estimating total GNP, a reasonable estimate of the total value of the black market, trade, and subsistence farming must be made. If these people join the fiscal system, overall GNP will rise, despite the fact that there would be no economic change.
C. Urbanization: A corn cob may cost a farmer 0.05 to produce, but it costs 1 in a large town’s store due to transportation and trade. As a result, the more urbanized a country becomes, the higher the price level becomes, but without any improvement in food quality. Although a farmer may have a larger home than a city person, the latter’s pricey home is included in GNP since it was built and is serviced within the official market, but the farmer’s home is not. A subsistence farmer can live comfortably on $500 per year, yet the same amount could put an urban person in abject poverty. Countries with a high rate of recent urbanization also have a high rate of total GNP growth. As a result, current GNP estimates indicate a country’s level of urbanization but not necessarily its prosperity.
D. Natural resource exports: When a country’s mineral gold, oil, or hardwood forest resources are made transportable through mining, refining, and sawmills, they represent a value in the country’s economy. When these resources are sold to another country, they are exchanged for virtual or paper money, which, if not properly reinvested within the same country, will lose its value due to inflation. The importance of investment within the country cannot be overstated. A country does not become wealthier by exchanging gold for paper money. These exported resources are included in the current model of total GNP, which includes them in national economic data. When Indonesia exports its hardwood lumber to Japan or Malaysia, or when the same lumber is turned into timber products and sold on international markets, the increased value benefits both the timber workers and the country. A recalculation of total GNP based solely on added value and excluding resource exports would significantly alter the results of countries that currently sell crude oil, raw copper, or other minerals.
E. Population growth: A country with a total GNP of 3.5 percent and 2.5 percent population increase over the same period has an average GNP per capita of just 1%. A more realistic statistic is GNI per capita. The fact that birth rates in many less developed countries are estimated is a concern with this method of measurement. The total GNP of nations with low birth rates, such as France or the Netherlands, can be lower than in countries with high birth rates, although the GNI per capita remains the same. As a result, focusing on total GNP figures is misleading.
The five challenges listed above are some of the reasons why many emerging countries had very low total GNP fifty years ago when compared to fully registered and taxed European countries. Their enormous informal sector was not counted, their natural resources were exported without adding value to the domestic market, and their population was growing rapidly. The value of GNP per capita is heavily influenced by the export of unprocessed natural resources and population growth. These compensatory factors must be calculated throughout all of these years in order to compare growth figures over a longer period. In publishing these corrected growth estimates, the IMF and World Bank should take the lead. Better indicators, such as the HDI, the Bhutan model, or inequality, must be established because people’s social and economic welfare is not just dependent on economic growth.
What exactly is the distinction between GDP and GNI?
- GDP is the total market value of all finished products and services produced in a certain time period inside a country.
- GNI is the entire revenue a country receives from its citizens and enterprises, whether they are based in the country or elsewhere.
- GNP encompasses all of a country’s citizens’ and enterprises’ earnings, whether they are reinvested in the country or spent overseas. Subsidies and taxes from other countries are also included.
Is GNI per capita a trustworthy indicator?
GNI per capita (in US dollars, converted from local currency using the Atlas technique) is used in the income classifications since it is the same methodology used by the World Bank to determine its operational lending policy. While it is recognized that GNI per capita does not completely summarize a country’s level of development or measure welfare, it has proven to be a useful and accessible indicator that is closely linked to other, nonmonetary measures of quality of life, such as life expectancy at birth, child mortality rates, and school enrollment rates.
Users should be aware of various limitations related with the use of GNI. For example, in lower-income economies with more informal, subsistence activities, GNI may be underestimated. GNI does not account for income distribution discrepancies. Users should also be aware that the Atlas technique for converting local currencies to the US dollar is based on official exchange rates, which do not take into consideration variances in domestic pricing levels. The Atlas technique, which uses three-year average exchange rates adjusted for inflation, reduces the impact of exchange rate volatility and rapid changes, but another option is to use the International Comparison Program’s purchasing power parity (PPP) conversion factors. However, concerns with methodology, geographic coverage, timeliness, quality, and extrapolation approaches have prevented PPP conversion factors from being used for this purpose to date.
Please see the World Bank’s Executive Directors’ staff report “Per Capita Income: Estimating Internationally Comparable Numbers,” which goes into greater detail about the purpose, methodology, and limitations of using per capita income, as well as alternative measures and the proposed system for grouping countries by income.
What makes GNI less than 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 production (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)
What does a decent GNI per capita look like?
Low-income economies are those with a GNI per capita of $1,045 or less in 2020, computed using the World Bank Atlas approach; lower middle-income economies are those with a GNI per capita of $1,046 to $4,095; and upper middle-income economies are those with a GNI per capita of $4,096 or more.