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 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.

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 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. 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 >>
  2. What is GDP and Why Is It So Important To Investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. What does ... Read Answer >>
  3. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  4. When do economists use real GDP instead of GDP?

    Learn about the purposes for which economists rely on real GDP. Find out how real GDP is calculated and how it is important ... Read Answer >>
  5. How does the United States government measure economic growth?

    Find out how the Bureau of Labor Statistics and the Bureau of Economic Analysis measure economic growth in the United States ... Read Answer >>
Related Articles
  1. Investing

    GNP a Tool For Economic Development

    In this article, we'll show you how to read the GNP map and how it's still a useful tool in measuring a nation's economic development and overall demand.
  2. 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.
  3. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  4. Insights

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
  5. Insights

    Does High GDP Mean Economic Prosperity?

    Find out how GDP is the typical indicator used to measure a country's economic health, what it fails to reveal, and how GPI can help.
  6. Financial Advisor

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  7. Insights

    The Hidden Truth Behind The U.S. Economic Recovery

    Learn how the economy is being artificially propped up by unsustainable monetary and fiscal policies.
  8. Insights

    Top 25 Developed and Developing Countries

    The difference between developed and developing countries, along with a list of the status of 25 nations around the world.
  9. Insights

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  10. Insights

    The World Bank's All-Important World Development Indicators (WDI)

    The World Development Indicators are the world's economic scorecards: they evaluate where nearly every country stands and how far it has yet to go.
RELATED TERMS
  1. Gross National Product - GNP

    Gross national product (GNP) is an economic statistic that includes ...
  2. Okun's Law

    Okun's law is the relationship between an economy's unemployment ...
  3. National Income Accounting

    National income accounting refers to the bookkeeping system that ...
  4. Real Economic Growth Rate

    The real economic growth rate is measure of economic growth expressed ...
  5. Real Gross Domestic Product (GDP)

    Real gross domestic product is an inflation-adjusted measure ...
  6. Economic Growth Rate

    An economic growth rate is a measure of economic growth, typically ...
Trading Center