The GDP (Gross Domestic Product) and GNP (Gross National Product) are two economic measurements that are used to provide insights into a country's economic growth and development. Both of these metrics have different definitions, which affect how they are calculated and interpreted. Understanding the difference between GDP and GNP is important because it helps us understand the economic health of a country and the well-being of its citizens.
Gross Domestic Product (GDP)
The GDP refers to the total value of all goods and services produced within a country's borders over a particular period of time, typically a year. The GDP includes the production of goods and services by all entities located within the country's borders, including foreign residents and businesses temporarily operating within the country.
To compute GDP, economists use a formula that subtracts the value of intermediate goods (goods used in the production of other goods) from the total value of goods and services produced. The formula can be represented as follows:
GDP = C + G + I + NX
C = personal consumption expenditures,
G = government spending,
I = gross private domestic investment,
NX = net exports (exports minus imports).
Thus, GDP is calculated by adding up all the spending on final goods, services and investments.
For instance, suppose a car manufacturer is based in the United States. If the manufacturer produces 2,000 cars in the United States in a given year, and each car is sold for $20,000, the total value of these sales would be $40 million. As a result, $40 million will be added to the country's GDP.
On the other hand, a service provider, say a software development company, may not have any research and development facility in the US but they can sell their software in the country. In this case, the income generated from these software sales will be taken into account in the US GDP calculation as it is a component of the country’s aggregate demand.
GDP is used to determine the size and growth of a country's economy and is one of the most widely used metrics to measure economic health. A high GDP indicates that a country is producing more and is contributing to economic growth.
Gross National Product (GNP)
The GNP is a measure of the total market value of all goods and services produced by a country's residents, regardless of their location, over a given period of time. In other words, GNP includes the production of goods and services by a country's citizens, regardless of where they live and work.
To calculate GNP, the following formula is used:
GNP = GDP + net income from abroad
Net income from abroad = Income earned by citizens from foreign sources minus income earned by foreigners in the country.
Thus, GNP is calculated by adding up the income earned by the residents of a country from abroad.
For instance, consider a Pakistani citizen who is working in Canada and has earned $10,000 in a year. Similarly, a Canadian citizen who is operating a business in Pakistan and has made $15,000. In this case, the GNP of Pakistan would be ($15,000-$10,000) + Pakistan's GDP.
The GNP is different from GDP in that it takes into account the value of a country's citizens, regardless of where they reside and work. GNP reflects the broader impact of a country's economic activity on its citizens, wherever they are located.
Difference Between GDP and GNP
The major difference between GDP and GNP is that GDP only considers the value of goods and services produced within a country's borders by all entities, irrespective of their residency status. In contrast, GNP considers the economic value produced by a country's citizens, no matter where they live and work in the world.
Moreover, GNP includes the net income earned by citizens abroad - whether investment income, interest or wages - in its calculation. It provides an overview of the global impact of a country's economic activity on its citizens. It also shows how much income is generated by the country's people regardless of their location or nationality and thus estimates the standard of living of the country’s citizens.
Hence GDP only reflects the performance of the domestic economy, while GNP reflects the impact of domestic production on the well-being of its citizens as well as how global economic activity affects the country's economic performance.
GDP and GNP are two fundamental measures of a country's economic performance. While GDP measures the value of all goods and services produced within a country's borders, GNP measures the income earned by citizens, no matter where they live and work in the world. These two measures provide different insights into a country's economic health and are useful for policymakers, investors, and analysts. Both GDP and GNP are important economic indicators for different purposes, but they should be used in combination with other economic indicators for a more comprehensive analysis of the economic health of a country.