A:

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 within an economy, plus the value of total imported goods and services less the total exported goods and services. GDP is considered more accurate when considering the geographic borders of an economy, while GNP accounts for all nationals or citizens of a given economy.

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 represent GNP is GDP 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 GDP.

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.

The first issue, inflation, can be handled 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.

RELATED FAQS
  1. What is the functional difference between GDP and GNP?

    Find out the difference between GDP and GNP, and how each brings a different perspective to the meaning of economic success. Read Answer >>
  2. What insights are economists trying to capture with GNP?

    Learn how, despite its disfavor as a primary economic indicator, GNP provides special insight into the value of production ... Read Answer >>
  3. Is GNP a valuable metric in a globalized economy?

    Learn about the value of GNP in a globalized economy and find out what information GNP can provide to policymakers and business ... Read Answer >>
  4. What does GNP say about the balance of trade?

    Learn about the interaction of GNP and the balance of trade. Find out how GNP is structured and the role that the balance ... Read Answer >>
  5. What does the rule of 70 indicate about a country's future economic growth?

    Find out more about the rule of 70, what it measures and what it indicates about a country's future economic growth rate. Read Answer >>
  6. How do you calculate GDP with the expenditures approach?

    Learn how to calculate gross domestic product, or GDP, using the expenditures approach, also known as the measurement of ... Read Answer >>
Related Articles
  1. Investing

    Deadly Flaws In Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect measures.
  2. Insights

    How to Calculate the GDP of a Country

    We explain how to calculate the GDP of a country using two different approaches.
  3. Insights

    How Is the GDP of India Calculated?

    India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
  4. Trading

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  5. Investing

    Something Gross in GDP

    GDP is used to gauge the strength of the economy, but what is it actually measuring?
  6. Insights

    Why Today's "Recession" Tops The Great Depression

    The financial, labor and economic statistics show the current recession is worse than most people think.
  7. Insights

    What The National Debt Means To You

    The U.S. deficit seems to grow every year. But how does it actually affect you?
  8. Insights

    Economic Growth

    Economic growth happens when the market value of the goods and services in an economy increase in one time period as compared to a prior time period.
  9. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  10. Insights

    Nominal vs. Real GDP

    GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country.
RELATED TERMS
  1. Gross National Product - GNP

    Gross national product (GNP) is an economic statistic that includes ...
  2. Gross National Product (GNP) Deflator

    An economic metric that accounts for the effects of inflation ...
  3. Per Capita

    A Latin term that translates into "by head," basically meaning ...
  4. Net National Product - NNP

    The monetary value of finished goods and services produced by ...
  5. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  6. Per Capita Gross Domestic Product

    Per capita GDP is a measure of the total output of a country ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present values of cash inflows and outflows. Used in capital budgeting ...
  2. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
Trading Center