What is the Difference Between GDP and GNP

GDP and GNP are two key indicators used to measure a country’s economic performance. Both represent the total value of goods and services produced over a specific period. However, they are calculated differently.

What is the difference between GDP and GNP? GDP focuses on the value of production within a country’s borders, whereas GNP takes into account the value of production by a country’s residents, including income earned abroad.

Key Areas Covered

1. What is GDP (Gross Domestic Product)
     – Definition, Features
2. What is GNP (Gross National Product)
     – Definition, Features
3. Similarities Between GDP and GNP
     – Outline of Common Features
4. Difference Between GDP and GNP
     – Comparison of Key Differences
5. FAQ: GDP and GNP
     – Answers to Frequently Asked Questions

Key Terms

GDP, GNP, Gross Domestic Product, Gross National Product

What is GDP

GDP (Gross Domestic Product) is the total value of all goods and services produced within a country’s borders over a specific period. It is usually measured annually or quarterly. It is one of the most widely used indicators of economic performance. This is because it gives a snapshot of a nation’s economic health.

GDP is calculated by adding up different components of a country’s economy: consumer spending, government spending, investments, and net exports (exports minus imports). If a country exports more than it imports, it has a trade surplus, which helps increase GDP.

Figure 1: Nominal GDP

There are different ways to look at GDP. Nominal GDP measures the economy’s value at current prices, while GDP adjusted for purchasing power parity (PPP) gives better comparisons between countries by accounting for differences in the cost of living. GDP per capita, which divides the total GDP by the population, gives an idea of the average economic output per person. It is often used to estimate living standards.

Governments and organizations such as the IMF (International Monetary Fund) and OECD (Organization for Economic Cooperation and Development) track GDP to assess economic growth and development. However, GDP has its limitations. It does not consider factors like environmental impact, unpaid labor, or overall well-being. Because of this, some economists suggest alternative measures like the Human Development Index (HDI) or the Better Life Index to get a fuller picture of a country’s progress.

What is GNP

Gross National Product (GNP) measures the total value of all goods and services produced by a country’s residents over a specific period, usually a year or a quarter. Unlike Gross Domestic Product (GDP), which focuses on economic activity within a country’s borders, GNP includes income that is earned by residents from overseas investments and subtracts income earned by foreign entities within the country.

GNP is calculated by adding up consumer spending, private investments, government spending, and net exports (exports minus imports). It also includes income earned by a country’s residents from foreign investments while subtracting any income foreign residents earn within the country.

Figure 2: Evolution of GNP in France

For example, many foreign companies operate in the United States and send their earnings back to their home countries. At the same time, American companies operate in other countries and generate income for U.S. residents. If U.S. businesses earn more abroad than foreign businesses earn within the U.S., the country’s GNP will be higher than its GDP.

Similarities Between GDP and GNP

• Both GDP and GNP are used to assess a country’s economic strength and growth over a specific period.
• Both metrics account for consumption, investment, government spending, and net exports in their calculations.
• Fiscal policies like government spending and taxation and monetary policies like interest rates and money supply impact both of them.

Difference Between GDP and GNP

Definition

• GDP (Gross Domestic Product) measures the total value of goods and services produced within a country’s borders, while GNP (Gross National Product) measures the total value of goods and services produced by residents, including income earned abroad and excluding income earned by foreign residents in the country.

Example

• If a U.S. company earns profits from its factory in Germany, that income is included in U.S. GNP but excluded from U.S. GDP because it was produced outside the U.S.

Formula

• GDP is measured as:
  GDP = Private Consumption + Government Spending + Investments + Net Exports (Exports – Imports)
  On the other hand, GNP is measured as:
  GNP = GDP + Income earned by residents abroad – Income earned by foreigners within the country

Importance

• GDP is used to measure domestic economic performance and growth, whereas GNP is used to assess the overall economic strength of a country’s residents and their global financial influence.

FAQ: GDP and GNP

1. What is the difference between GDP and GNP ratio?

The GDP focuses on a country’s gross domestic product (total production within its borders), while the GNP ratio focuses on a country’s gross national product (total income earned by its residents, including overseas earnings).

2. What is the main difference between GDP and GNI?

GDP measures the total value of goods and services produced within a country’s borders. GNI (Gross National Income) measures the total income earned by a country’s residents, including money earned from overseas investments and excluding income earned by foreigners within the country.

3. Why is GDP greater than GNP?

GDP is greater than GNP when a country has more foreign companies operating within its borders than its own companies earning income abroad. This means that the total value of goods and services produced inside the country (GDP) is higher than what its residents earn from both domestic and foreign sources (GNP).

4. What is the difference between GNP and real GNP?

GNP is the total value of goods and services produced by a country’s residents, while real GNP adjusts for inflation to show the true value over time.

5. What is the difference between GDP and national income?

GDP is the total value of goods and services produced in a country, while national income is the total earnings of a country’s residents, including wages, profits, and rents.

Reference: 

1. “Gross Domestic Product (GDP) Formula and How to Use It.” Investopedia.

2. “Understanding and Calculating Gross National Product (GNP).” Investopedia.

Image Courtesy:

1. “Countries by GDP (Nominal) in 2014” By Ali Zifan – Own work; Used a blank map from here. (CC0) via Commons Wikimedia

2. “Evolution of GNP of France from 1950 to 2013” By Docteur Saint James – Own work (CC BY-SA 4.0) via Commons Wikimedia