Understanding and Calculating Gross National Product (GNP)

Gross national product (GNP) is a slightly modified version of gross domestic product (GDP). The GNP of a country is equal to the value of all goods and services produced by the nationals of a country's economy plus the value of total imported goods and services less the total exported goods and services – no matter where they are located or where the money is earned. By comparison, GDP limits calculations to value within the nation's physical limits. GDP is considered more accurate when considering the geographic borders of a country's economy, while GNP accounts for all nationals or citizens of a given economy. (For related reading, see "Understanding GDP vs. GNP")

Suppose a U.S. citizen moves to Scotland and opens a business making raincoats. GNP would count this activity towards the total production of the United States, not the United Kingdom. Conversely, GDP would count this activity towards the U.K.

Official Formula for GNP

The simplified version of the official GNP formula can be written as the sum of consumption by nationals, government expenditures, investments by nationals, exports to foreign consumers and foreign production by domestic firms minus the domestic production by foreign firms.

Another way to calculate GNP is to take the GDP figure, plus net factor income from abroad.

All data for GNP is annualized and can be adjusted for inflation to produce real GNP. In a sense, GNP represents the total productive output of all workers who can be legally identified with the home country.

There are several problematic complications of using GNP. One is how to account for individuals who hold dual citizenship. If the aforementioned raincoat manufacturer has dual U.K. and U.S. citizenship, and both nations claim all of his productive output, then his efforts are counted twice when estimating global GNP.

Globalization and GNP

The global economy is increasingly interconnected. It is possible for a citizen in one country to produce goods and services in many countries simultaneously over the Internet or through modern supply chains. This raises definitional and accounting issues for GNP calculations.

Partially for this reason, the Bureau of Economic Analysis (BEA) uses GDP rather than GNP. Contemporary macroeconomics stresses the importance of spending in a national economy. Suppose a German automaker builds a car manufacturing plant in Alabama. According to demand-side theory, the jobs created in Alabama increase spending and create economic growth in the U.S., not Germany.

Both GNP and GDP track economic growth by aggregating total income, but the income produced from GDP is much more geographically sensitive than the income produced from GNP.

Measuring Economic Growth

The U.S. actually used GNP as its official measure of economic welfare until 1991, after which it switched to GDP. However, some economists question the validity of using GDP to compare different economies or the same economy across time. One issue these economists raise is inflation. However, inflation can be accounted for by creating reliable price indexes and adjusting for standardized values. A second issue is population size: China and India have many more possible producers and consumers than, say, Switzerland or Ireland. Most economists advocate using GNP or GDP per capita to account for the real impact of income growth on individuals. There are other objections as well, but almost all contemporary accounts of economic size and growth are tracked in terms of GDP.