GDP vs. GNP: An Overview
Gross domestic product (GDP) is the value of a nation's finished domestic goods and services during a specific time period. A related but different metric, the gross national product (GNP), is the value of all finished goods and services owned by a country's residents over a period of time.
Both GDP and GNP are two of the most commonly used measures of a country's economy, both of which represent the total market value of all goods and services produced over a defined period.
There are differences between how each one defines the scope of the economy. While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals.
- Gross domestic product (GDP) and gross national product (GNP) are both widely used measures of a country's aggregate economic output.
- GDP measures the value of goods and services produced within a country's borders, by citizens and non-citizens alike.
- GNP measures the value of goods and services produced by only a country's citizens but both domestically and abroad.
- GDP is the most commonly used by global economies. The United States abandoned the use of GNP in 1991, adopting GDP as its measure to compare itself with other economies.
Explaining GDP Vs. GNP
Gross Domestic Product
Gross domestic product is the most basic indicator used to measure the overall health and size of a country's economy. It is the overall market value of the goods and services produced domestically by a country. GDP is an important figure because it gives an idea of whether the economy is growing or contracting.
The United States uses GDP as its key economic metric and has since 1991; it replaced GNP to measure economic activity because GDP was the most common measure used internationally.
Calculating GDP includes adding together private consumption or consumer spending, government spending, capital spending by businesses, and net exports—exports minus imports. Here's a brief overview of each component:
- Consumption: The value of the consumption of goods and services acquired and consumed by the country’s households. This accounts for the largest part of GDP
- Government Spending: All consumption, investment, and payments made by the government for current use
- Capital Spending by Businesses: Spending on purchases of fixed assets and unsold stock by private businesses
- Net Exports: Represents the country's balance of trade (BOT), where a positive number bumps up the GDP as country exports more than it imports, and vice versa
Because it is subject to pressures from inflation, GDP can be broken up into two categories—real and nominal. A country's real GDP is the economic output after inflation is factored in, while nominal GDP is the output that does not take inflation into account. Nominal GDP is usually higher than real GDP because inflation is a positive number. It is used to compare different quarters in a year. The GDPs of two or more years, though, are compared using real GDP.
GDP can be used to compare the performance of two or more economies, acting as a key input for making investment decisions in a country. It also helps government draft policies to drive local economic growth.
When the GDP rises, it means the economy is growing. Conversely, if it drops, the economy shrinks and may be in trouble. But if the economy grows to the point where inflation builds up, a country may reach its full production capacity. Central banks will then step in, tightening their monetary policies to slow down growth. When interest rates rise, consumer and corporate confidence drops. During these periods, monetary policy is eased to stimulate growth.
To draw a parallel, if a family earns $75,000 a year, their spending should ideally remain within their earnings range. It is possible that the family’s spending may overshoot their earnings once in a while, like while buying a house or a car on loan, but then it returns to the limits over a period of time. Longer periods of negative GDP, which indicates more spending than production, can cause big damage to the economy. It leads to jobs loses businesses closures and idle productive capacity.
Gross National Product
Gross national product is another metric used to measure a country's economic output. Where GDP looks at the value of goods and services produced within a country's borders, GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.
While GDP is an indicator of the local/national economy, GNP represents how its nationals are contributing to the country's economy. It factors in citizenship but overlooks location. For that reason, it's important to note that GNP does not include the output of foreign residents.
For example, a Canadian NFL player who sends his income home to Canada, or a German investor who transfers the dividend income generated from her shareholdings to Germany, will both be excluded from GNP. On the other hand, if a U.S.-based news reporter is sent to South Korea and sends her Korean earnings home, or a U.S.-based airline generates income from its overseas operations, they both contribute positively to the country's GNP.
GNP can be calculated by adding consumption, government spending, capital spending by businesses, and net exports (exports minus imports) and net income by domestic residents and businesses from overseas investments. This figure is then subtracted from the net income earned by foreign residents and businesses from domestic investment.
Examples of GDP and GNP
A quick look at the absolute GDP and GNP numbers of a particular country over the past two years indicate they mostly move in sync. There is a nominal difference between GDP and GNP figures of a particular country depending upon how the economic activities of the nation are spread across domestically or globally.
(All Figures in Billions of USD)
For instance, many American businesses, entrepreneurs, service providers, and individuals who operate across the globe have helped the nation secure a positive net inflow from the overseas economic activities and assets. This bumps up U.S. GNP, making it higher than the GDP of the U.S. for the years 2016 and 2017.
Greece, which was recently going through a long-running financial problem owing to a debt crisis, also has higher GNP than GDP. This indicates its citizens producing and contributing more through their overseas operations—a net addition contributing to the higher GNP. Amid the economic crisis in Greece, not many foreigners may be operating in a country which may limit its GDP.
Other nations like China, the U.K., India, and Israel have lower GNP compared to corresponding GDP figures. This indicates these nations are seeing a net overall outflow from the country. Citizens and businesses of these countries operating overseas are generating lesser income compared to the income generated by the foreign citizens and businesses operating in these countries.
The percentage figures in the table above (GNP/GDP-%), which represents GNP as a percentage of GDP, indicates that the absolute difference between the two figures remains confined within a range of plus or minus 2%. It can be inferred that irrespective of one figure being higher than the other, the difference is minimal.