GDP and GNP
Gross Domestic Product (GDP) and Gross National Product (GNP) are two monetary aggregates used in the calculation of national income in economics. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. GNP is the sum of the total value of all final goods and services produced within a nation in a particular year and the total income earned by its citizens (including income of those located abroad) from which the total income of the non-residents located in that country is subtracted. GNP is less commonly referred to than GDP, but is referred to as the measure of national income.
GDP includes all private and public consumption, government outlays, investments and net exports that occur within a defined territory. Thus, GDP is a broad measurement of a nation’s overall economic activity.
Gross domestic product can be calculated using the following formula:
GDP = C + G + I + ( X – M )
where C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including business capital expenditures and ( X – M ) is the nation’s total net exports, calculated as total exports (X) minus total imports (M).
Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It’s not hard to understand why a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
GNP is a broad measure of a nation’s total economic activity. GNP is the value of all finished goods and services produced in a country in one year by its nationals, regardless of their location. It includes income earned by citizens and companies abroad, but does not include income earned by foreigners within the country. GNP is a measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal.
The figures used to assess GNP include the manufacturing of tangible goods (cars, furniture and agricultural products) and the provision of services (education, healthcare, and business services). GNP does not include the services used to produce manufactured goods because their value is included in the price of the finished product. However, GNP does include depreciation and indirect taxes like sales tax.
The formula for calculating GNP is:
Consumption + Government Expenditures + Investments + Exports + Foreign Production by U.S. Companies – Domestic Production by Foreign Companies = Gross National Product
GDP and GNP both try to measure the market value of all goods and services produced for final sale in an economy. The difference is in how each term interprets what constitutes the economy. GDP refers to and measures the domestic levels of production, whereas GNP measures the levels of production of any person or corporation of a country. Whereas GNP includes the value of products made by a country’s citizens and companies abroad, excluding the value of products made by foreign companies within the reporting country, GDP only accounts for products made within a country’s borders.
Depending on circumstances, GNP can be either higher or lower than GDP. This depends on the ratio of domestic to foreign manufacturers in a given country. For example, China’s GDP is $300 billion greater than its GNP due to the large number of foreign companies manufacturing in the country, whereas the GNP of the U.S. is $250 billion greater than its GDP, because of the mass amounts of production that take place outside of the country’s borders.
GNP shares an interesting relation with GDP. For example, the larger the difference between a country’s GNP and GDP, the more a country is involved in international trade, finance and production.
Due to the increasingly global nature of national economies and the interdependence of labour forces, supply chains and sales channels, the use of GDP instead of GNP as the measure of output has increased.
Though both calculations attempt to measure the same thing, generally speaking, GDP is the more commonly utilized method of measuring a country’s economic success in the world, but GNP is useful as well. It is important to refer to both when trying to get an accurate description of a given country’s economic worth.
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