In the arena of economics and finance, Gross Domestic Product (GDP) and Gross National Product (GNP) are two key measures that are widely used to evaluate a country’s economic performance. While both metrics seek to evaluate economic activity, they differ greatly in terms of scope. Understanding these distinctions is critical for effectively reading economic data and making sound policy choices.
What is Gross Domestic Product (GDP)?
Gross Domestic Product, or GDP, is a key economic statistic that represents the entire value of all products and services produced inside a country’s boundaries during a given time period, usually a year or quarter. It is one of the most commonly used indicators for assessing a country’s economic success.
What are the Components of GDP?
GDP may be computed using three major methodologies, each of which provides a unique viewpoint on economic activity:
1. Production Approach
This method calculates the value contributed at each stage of production. Value added is the difference between a sector’s output and its intermediate inputs. We may calculate the economy’s overall production by aggregating the value added across all sectors.
2. Income Approach
This technique determines GDP by adding all income received by factors of production inside a country. These revenues include labor wages and salaries, land rentals, capital interest, and profits for entrepreneurs. Essentially, it shows the distribution of profits throughout the economy.
3. Expenditure Approach
This technique calculates all spending on final products and services within a country. It comprises personal consumption, corporate investment, government expenditure, and net exports (the difference between exports and imports).
This technique yields the following GDP formula: GDP=C+I+G+(X−M)
4. Limitations of GDP
While GDP is an important statistic, it does have limits. It does not account for income distribution among a country’s population, nor does it take into account the informal economy or non-market transactions such as volunteer work and home labor. Furthermore, GDP does not account for environmental degradation or the loss of natural resources, which might be essential to long-term sustainability. As a result, while GDP is an important economic metric, it should be used in combination with other indicators to create a more comprehensive picture of economic well-being and growth.
The Significance of GDP
GDP is a comprehensive indicator of a nation’s economic activity and health. It gives information on the size and performance of an economy, allowing you to track growth and discover economic trends. Policymakers and economists use GDP statistics to make educated fiscal and monetary policy choices. For example, rising GDP signals a healthy, increasing economy, which may result in higher investment and job growth. In contrast, a falling GDP might indicate economic problems, necessitating government action to boost growth.
What is the Gross National Product (GNP)?
GNP gives a more comprehensive image of a nation’s economic standing by taking into account the citizens’ economic production on a national and worldwide level.
1. The Components of GNP
GNP includes numerous critical components that create a complete measure of economic activity. First, it comprises domestic production, which is the value of all commodities and services generated within a country’s boundaries. This component is essentially equal to GDP.
Second, GNP includes net revenue from overseas. This net income represents the difference between the revenue obtained by locals from foreign investments and the income gained by foreigners from domestic investments. It includes revenues from investments, commercial operations, and employment conducted overseas by residents, but excludes earnings from equivalent activities undertaken within the nation by non-residents.
The formula for determining GNP is: GNP = GDP + Net Income from Abroad.
2. Significance
GNP provides a more comprehensive view of a country’s economic performance by accounting for its inhabitants’ worldwide economic activity. This metric is especially useful for nations with significant foreign investment and expatriate populations. GNP, which includes overseas revenue, gives a more comprehensive picture of a country’s economic strength and overall financial well-being. It depicts the entire economic output of a country’s population, regardless of where production takes place, providing insight into a country’s worldwide economic impact and financial stability.
3. Practical Implications and Limitations
GNP is a useful instrument for policymakers and economists to analyze a country’s overall economic performance and people’s well-being. It is especially important for countries with considerable foreign investments and remittances since it measures the impact of international economic activity. However, GNP has limits. It may not adequately reflect home economic realities if a significant amount of a country’s income comes from outside. Furthermore, like GDP, GNP does not take into consideration income inequality, environmental damage, or non-market activities such as volunteer and home labor. Despite these limitations, GNP remains an important indicator for assessing the economic success of nations with large international economic activities since it provides a comprehensive picture of national economic strength and resident financial health.
Applications of GDP and GNP Figures
GDP and GNP data are calculated per capita to provide an overview of a country’s economic progress. GDP (or Gross Domestic Product) may be directly compared to GNP (or Gross National Product) to determine the link between a country’s exporting business and its domestic economy. A region’s GDP is one way to evaluate the size of its local economy, whereas GNP reflects a country’s overall economic strength. These numbers may also be used to assess the distribution of wealth within a community as well as the average purchasing power of each person in the country.
Increased exports will result in a rise in the country’s GDP and GNP. Similarly, a rise in imports will reduce GDP and GNP. However, a rise in exports may result in an increase in GDP rather than GNP. The exact connection will depend on the company’s nationality status while exporting or importing.
For example, if Microsoft Corporation has a 100% owned subsidiary in China and that office exports US$2 billion in services outside of the country, China’s GDP will increase by US$2 billion. However, it will not be included in the GNP calculation since the export is carried out by a US corporation rather than a Chinese company.
Examples of GDP and GNP
Example 1:
Considering the United States, which has an extremely diverse economy, The United States’ GDP comprises all commodities and services generated within its boundaries, whether by American or international enterprises. For example, if KIA, a Japanese car manufacturer, runs a facility in Kentucky, the value of the automobiles manufactured there adds to the United States’ GDP. Similarly, if an American business, Apple, manufactures iPhones in California, the value of those iPhones is included in the United States’ GDP. These examples demonstrate that GDP is simply concerned with the site of production rather than the nationality of the producers.
Example 2:
In a contrasting scenario, consider Germany, which is recognized for its robust industrial industry. If Volkswagen makes automobiles in Germany, the value of those vehicles contributes to Germany’s GDP. In addition, the GDP includes services offered by German enterprises within Germany, such as software development or financial consultancy. Thus, GDP represents the economic activity that occurs within the country’s physical boundaries.
Examples of GNP
Example 1:
Let’s now look at GNP, which is the entire value of products and services generated by a nation’s citizens, regardless of where those goods and services are produced. Using the US as an example once more, GNP would include the earnings made by US businesses doing business overseas. The revenues from American multinational corporations, such as Coca-Cola, that have bottling operations in Brazil are included in the gross domestic product (GNP). This is so that the revenue produced worldwide by American citizens and enterprises is included in the GNP.
On the other hand, any earnings made by foreign businesses that are based in the country—like Toyota’s Kentucky plant—are not included in the GNP of the United States. As a result, whereas GDP tracks local economic activity, GNP offers a more comprehensive view by taking into account citizens’ overseas economic activity.
Example 2:
A different instance would be a global corporation based in Switzerland that is well-known around the world, such as Nestlé. Switzerland’s GNP includes the revenue from Nestlé’s plants in other nations, including Brazil and India. This illustrates how, regardless of the location of production, GNP represents the economic contributions made by a nation’s citizens.
These examples show how GDP and GNP differ from one another. GDP is a valuable metric for evaluating domestic economic activity and growth since it concentrates on the place of output. GNP, on the other hand, takes into account foreign revenue flows, giving a more complete picture of a nation’s economic health and citizens’ financial security.
Key Differences Between GDP and GNP
| Aspect | GDP | GNP |
| Definition | Total amount of products and services within in a country | Total amount spent by locals on goods and services |
| Scope | Produced domestically | Both local and foreign production |
| Inclusion | Production within borders | Revenue received by citizens worldwide |
| Exclusion | Produced by locals abroad | Domestic production by foreign nationals |
| Purpose | Calculates the level of domestic economic activity | Assesses the general economic health of the population |
Criticism of GDP and GNP
GDP Criticism
While GDP has long been a mainstay of economic assessment, there are many who criticize it for being too limited. The fact that GDP does not take income disparity into account is one of the main critiques. Although GDP may be used to measure economic growth, it cannot reveal the distribution of wealth within a population. Significant inequality, in which the majority of wealth is concentrated in the hands of a few people, leaving a sizable portion of the population economically disadvantaged, can coexist with a high GDP.
The fact that GDP ignores non-market interactions is a further serious criticism. Because they don’t entail market exchanges, many worthwhile activities, including domestic labor, volunteer work, and caregiving, are excluded from GDP statistics. An underestimation of a society’s true economic activity and well-being may result from this exclusion.
GDP disregards environmental deterioration as well. The statistic does not take into consideration the expenses associated with the production and consumption of natural resources or the depletion of such resources. This may present an inaccurate image of long-term, steady economic progress. For instance, a nation’s GDP may increase while it concurrently depletes its natural resources and damages the environment, which is unsustainable over the long run.
GNP Criticism
Given that it includes foreign revenue, the gross national product (GNP) is criticized even if it provides a wider view than the GDP. One major problem is that the GNP may give an inaccurate picture of the state of the domestic economy. Even in nations where there have been significant foreign investments, low local economic circumstances may nonetheless be reflected in a high GNP. As a result, inaccurate judgments on the state of the economy may be drawn. Like GDP, GNP does not take income distribution into consideration. Income is totaled, but the distribution of income among inhabitants is not indicated. As a result, while many citizens may not see an increase in their standard of living, the GNP may reflect economic strength.
Neither GDP or GNP takes into account non-economic aspects of well-being, including health, education, and the standard of living. These indicators highlight the need for more thorough measurements of development since they offer a constrained picture of a country’s overall progress and prosperity.
Countries with Highest GDP
| Rank | Country | GDP (USD Billion) |
| 1 | USA | 28,783 |
| 2 | China | 18,536 |
| 3 | Germany | 4,590 |
| 4 | Japan | 4,112 |
| 5 | India | 3,942 |
| 6 | UK | 3,502 |
| 7 | France | 3,132 |
| 8 | Brazil | 2,333 |
| 9 | Italy | 2,332 |
| 10 | Canada | 2,242 |
Countries with Highest GNP
| Rank | Country | GNP (Last available data 2022) |
| 1 | USA | $25,586,010,591,417 |
| 2 | China | $18,151,669,555,228 |
| 3 | Japan | $5,324,574,664,050 |
| 4 | Germany | $4,527,641,437,157 |
| 5 | India | $3,385,774,166,120 |
| 6 | UK | $3,297,975,918,484 |
| 7 | France | $3,078,220,992,201 |
| 8 | Italy | $2,251,550,230,585 |
| 9 | Canda | $2,075,403,578,073 |
| 10 | Russia | $1,870,592,442,853 |
Conclusion
Both the GDP and the GNP are important economic statistics, although they have diverse uses and application areas. In order to reflect domestic economic activity, GDP calculates the total worth of goods and services generated within a nation’s boundaries. GNP, on the other hand, gives a more comprehensive picture of a nation’s economic strength by taking into account the citizens’ economic production on a national and worldwide level. A country’s citizens’ international economic activity may be understood using GNP, but GDP is helpful in evaluating domestic economic performance. The shortcomings of both measures include their disregard for non-market activity, economic inequality, and environmental effects. A more holistic knowledge of the state and well-being of the economy may be achieved by taking into account the GDP and GNP in addition to other indicators in a thorough economic study.
FAQs
What Makes GDP and GNP Different From Each Other?
The Gross National Product (GNP) is a measure of a nation’s overall economic output, whereas the GDP only accounts for the production of finished products and services produced within its boundaries.
Which Countries Have the Highest GDP in the World?
These countries are highest in terms of GDP
- United States
- China.
- Germany
- Japan
- India
- The United Kingdom
- France
- Brazil
- Italy
- Canada
Why is GNP Possibly Lower than GDP?
Gross domestic product + foreign revenue received by citizens less domestic income given to foreign residents is the definition of gross national product. Thus, a net outflow of revenue to foreigners is implied when GDP exceeds GNP.
What Does the GNP Aim to Achieve?
One indicator of a country’s economic production is its gross national product. The total value of goods and services generated by a nation’s population both at home and abroad, less the income received by its overseas residents, is the country’s gross national product.
What are Some Ways to Raise GDP?
Economic growth, which is frequently represented as GDP and GNP growth, is usually the result of several interrelated processes working together. Governments may employ a variety of tactics, including tax cuts or refunds, deregulation, and infrastructure spending, to attempt and promote