National (or regional) economies across the globe go through different phases of economic cycle. They are broadly classified as expansion, depression, recession and recovery phase of the economy. Various quantitative measures are used to reflect the financial health and the economic phase of a country during a given timeframe. The most commonly used figures are the Gross Domestic Product (GDP) and the Gross National Product (GNP), each of which represents the total market value of all goods and services produced in an economy over a defined period.
However, the two popular terms differ in how each one defines the scope of the economy. While GDP limits its interpretation of economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals. Simply put, GNP is a superset of GDP. This article explains the difference between the two important factors with recent examples and data.
Explaining GDP Vs. GNP
GDP – The Basic Indicator of an Economy
Let’s begin with the more popular GDP, and then extend the context to cover GNP.
GDP is the single number of the total monetary value of all the finished goods and services produced within a country's borders (domestically) during a particular time period (quarterly/annually).
When the newspaper headline reads as the nation’s economy grew 3.1 percent during a particular year, it refers to the GDP growth. It simply indicates that the country produced goods and services whose monetary value was 3.1 percent higher in that year compared to the previous year.
This single number is extremely useful to gauge the overall economic health of the nation or the implications of its government policies. For example, if one needs to compare whether a country (like America) was better off during a particular regime (Clinton, Bush or Trump), a look at GDP figures and growth rates during the corresponding periods would provide the necessary inference. Effects of macroeconomic decisions can also be studied through (change in) GDP figures. If a particular country opens up the domestic market for foreign investments or lowers the tax rates for bolstering manufacturing, its effects can be verified by checking how much GDP growth was achieved attributed to the decision. GDP also acts as a standard number that can be used to compare the performance of two or more economies, and acts as a key input for making investment decisions in a country. It also helps government draft policies to drive local economic growth. (See The GDP And Its Importance.)
GDP is based on simple concept that in the long run, a country’s consumption needs to be similar to its production. While sporadically there can be mismatches, like higher consumption compared to production during a particular year, such mismatches cannot sustain for long. 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, 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.
Mathematically, GDP for a particular country over a period of time is calculated as follows: (All figures correspond to activities within the geographical boundaries of the country)
GDP = Private Consumption + Gross Investment + Government Investment + Government Spending + (Exports – Imports)
- Private Consumption, which usually accounts for the largest part of the GDP, is defined as the value of the consumption goods and services acquired and consumed by country’s households
- Gross Investment is the spending on purchase of fixed assets and unsold stock by private businesses
- Government Investment includes investment and payments made by the government for creation of future benefits - like investment in infrastructure development projects or healthcare schemes
- Government Spending includes all consumption, investment and payments made by the government for current use - like money spent on capital goods and services to help run the present-day operations, and
- (Exports – Imports) represents country’s balance of trade (BOT), where a positive number bumps up the GDP as country exports more than it imports, and vice versa
While multiple methods exist for calculating GDP, the above mentioned spending-based calculation represents total money spent by the nation’s consumers on their consumption of goods and services, by businesses on their investments and operations, and by government on the macro-level activities – all within the geographical boundaries of the country. Since economy includes export and import of goods and services to and from overseas markets, the GDP calculation also accounts for it.
Extending GDP to GNP
GNP is the aggregate market value of all goods and services produced by all of its citizens and businesses irrespective of their location (local or global) during a particular period. Essentially, GNP acts as a superset of GDP, as it factors in the net income from abroad in addition to the GDP.
GNP = GDP + (Net income earned by domestic residents/businesses from overseas investments) – (Net income earned by foreign residents/businesses from domestic investments)
If a UK-based BBC news reporter is deputed to South Korea and she sends her Korean earnings to her home country, or a UK-based airline generates income from its overseas operations - they both will contribute positively to the GNP of UK (second factor in the GNP formula).
However, an American footballer playing in the English Premier League and sending his income to the U.S., or a German investor transferring the dividend income generated from her British Telecom share holdings to Germany, or an Indian corporation moving profits from their UK-based factory to India - they all will reduce the GNP of UK (third factor in the GNP formula).
Key Differences between GDP and GNP
- While both measure and represent economic activity of a nation, the scope of GDP is within the geographical limits of the country and that of GNP extends to other countries/regions for activities performed and net income generated by its nationals. GDP measures the monetary value within the country's boundary (local scale), while GNP additionally includes it for the enterprises/activities owned/operated/performed by the residents of the country (local + global).
- GDP outlines the strength of country's local economy and is an indicator of country’s stability, while GNP represents how its nationals are contributing towards country's economy.
- GDP is based on location, while GNP is based on citizenship.
- GDP is commonly referred to as the measure of regional output, while GNP is best described as the measure of national output. Higher GNP than GDP indicates that citizens of a country are doing better abroad.
- Owing to the different accounting standards across the globe and the requirements of forex conversion, there may be definitional and accounting issues for GNP calculations. GDP numbers usually don’t face such computational challenge and remain uniform.
- If an economy were closed, then GNP = GDP.
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. In a randomly selected set of six countries, it can be observed that GNP can be higher than GDP, or vice versa. 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, the good number of American businesses, entrepreneurs, service providers and individuals who operate across the globe has helped the nation secure a positive net inflow from the overseas economic activities and assets. This bumps up the U.S. GNP, making it higher than the GDP of the U.S. for the years 2016 and 2017.
Greece, which is going through a long running financial problem owing to debt crisis, also has higher GNP than GDP. It indicates that its citizens are able to produce and contribute more through their overseas operations, which is a net addition contributing to the higher GNP. Amid economic crisis in Greece, not many foreigners may be operating in country which is limiting its GDP and helping to keep a net positive foreign inflow of income. (See also, The Origins Of Greece's Debt Crisis.)
Other nations like China, U.K., India and Israel have lower GNP figures than the corresponding GDP figures. It indicates that these nations are seeing a net overall outflow from the country. Citizens and businesses of these countries that are 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 above table (GNP/GDP-%), which represents GNP as a percentage of GDP, indicates that the absolute difference between the two figures remain confined within a range of plus or minus 2 percent. It can be inferred that irrespective of one figure being higher than the other, the difference is minimal.
It is not necessary that a country always has higher GNP than GDP, or vice versa. Knoema data indicates that between 2001 and 2008, U.K.’s Gross National Income (GNI), a GNP variant that better measures the income of a country, exceeded its GDP in local currency (GBP). However, the trend reversed from 2012 when GDP surpassed GNI of the country.
A look at how the figures change relative to each other from one year to another indicates they move in sync and are highly correlated.
For instance, when the GDP of the U.S. increased by 4.11% between 2016 and 2017, the GNP also followed suit with a rise of 4.26%. As U.K.’s economy absorbed the repercussions of Brexit after the mid-2016 referendum, its GDP declined by 1.07%. Its GNP followed with a decline of 0.32%. However, the relatively better performance of GNP for U.K. indicates that its overseas businesses were doing much better, compared to the domestic ones. It can be attributed to the Brexit effects which hit the local economic activities to much larger extent compared to those operating overseas.
The Bottom Line
Both GDP and GNP attempt to measure and represent the same thing. Though GDP remains the more popular method of measuring a country's economic success, GNP is catching up fast. With technology aiding rapid expansion and conduct of business activities across the globe, the blurring lines between local and global operations for a business or an individual are leading to global adoption of both the quantitative factors.
There are multiple variants of these two measures, which include GDP/GNP growth rate, GDP/GNP from a particular sector, GDP/GNP per capita, and GDP/GNP in local currency unit. For instance, a higher GNP than GDP in local currency unit may convert to higher GDP than GNP when converted to U.S. dollars. Economists, investors, policy makers and researchers look at a combination of these multiple macroeconomic factors to draw meaningful inferences.