Measuring Economic Conditions: GNI or GDP?

While gross domestic product (GDP) is among the most popular of economic indicators, gross national income (GNI), is quite possibly a better metric for the overall economic condition of a country whose economy includes substantial foreign investments. This is because the GNI calculates an economy's total income, regardless of whether the income is earned by nationals within the country's borders or derived from investments in foreign business. GNI and GDP may vary considerably because of the basic fact that they measure different things.

Key Takeaways

  • Gross domestic product (GDP) and gross national income (GNI) are two measures of economic activity, but what they measure differs.
  • GDP looks at the production level of an economy or the total annual value of what is produced in the nation; it measures an economy's size and growth rate.
  • GNI is the total dollar value of everything produced by a country and the income its residents receive—whether it is earned at home or abroad.
  • GDP is useful for central banks when enacting monetary and fiscal policies, but it is a flawed measure that may not account for the reasons and likely duration of an economic upturn or downturn.
  • GNI can be useful to consider as an alternative to GDP, particularly as a way to understand the totality of income received by nationals.

Gross Domestic Product

GDP is a metric that measures the production level of a country’s economy, commonly defined as the total annual value of the goods and services produced in that country. GDP is one of the well-known economic indicators, widely used by both investors and market analysts. It is intended to gauge the overall size, in terms of productive output, of an economy, as well as its current growth rate.

Central banks often rely on the GDP figures to determine how well the economy is functioning, and whether it is more susceptible to inflationary or recessionary pressures. Based on GDP and other fundamental economic metrics, economists make decisions regarding taxes, government spending, monetary and fiscal policies that can have a significant impact on a nation's economy for years to come.

Shortcomings of Gross Domestic Product

In spite of its popular use, there are a number of potential shortcomings of the GDP measure. One such shortcoming is the measure's failure to properly attribute economic upturns or downturns to genuine changes in the economy's health or to just temporary, cyclical fluctuations. Another possible weakness of GDP is it sometimes tends to lead to overcorrections by government authorities, such as the U.S. Federal Reserve, creating situations where monetary policy is tightened to reduce inflationary pressures. This leads to a threat of recession, reacted to by easing money supply restrictions, which leads to inflationary pressures – and on and on. In comparison with GNI, GDP specifically falls short in its failure to consider income earned outside of the country.

Gross National Income and Gross National Product

GNI is the total dollar value of all items produced by residents of a country and the income received by the country's residents, including property income and employee compensation. The major strength of GNI as an economic metric is the fact it recognizes all income that goes into a national economy, regardless of whether it is earned within the country or overseas. In this sense, there is very little difference between GNI and gross national product (GNP), another alternative metric to GDP; it calculates a country’s total amount of productive output from all of its citizens and companies, including both domestically generated production and production generated by the country's citizens or businesses in other countries.

GNI is a helpful metric to consider simply by virtue of the fact it provides an alternative perspective to that provided by GDP and can, therefore, aid analysts in obtaining a more complete picture of total economic activity.