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WHAT IS GDP AND GNP? Economics 101: What Is the Difference Between GDP and GNP? Original article: Peter Burgess COMMENTARY Peter Burgess | ||
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Economics 101: What Is the Difference Between GDP and GNP?
Written by MasterClass Last updated: Oct 12, 2022 In economics, Gross Domestic Product (GDP) is used to calculate the total value of the goods and services produced within a country’s borders, while Gross National Product (GNP) is used to calculate the total value of the goods and services produced by the residents of a country, no matter their location. Essentially, GDP looks for the amount of economic activity within a nation’s economy, while GNP looks at the value of the economic activity generated by the nation’s people. This means that GNP will count the economic activities of expatriates and other citizens outside the country’s borders but GDP will not, and that GDP will consider the activities of non-citizens within those borders, but GNP will not.
Paul Krugman Teaches Economics and Society What Is GDP? GDP, or gross domestic product, measures the total economic value of all final goods and services produced within a country’s borders during a specific period of time. An expression of an economy’s relative health—an increase in GDP indicates a country’s economy is growing and a decrease that it is shrinking—GDP is used by economic policymakers, in the United States, and across the world, to determine interest rates and other economic policy. There are two types of GDP:
How Is GDP Calculated? GDP is calculated in one of two ways: the income approach, and the expenditure approach. Though the latter is by far the more popular way to measure GDP, both methods should arrive at roughly the same number. In the income approach, also known as GDP(I), economists add employee compensation, gross profits, and taxes minus subsidies to arrive at a figure representing the income an economy generates. In the expenditure approach, economists add total consumption, investment, government spending, and net exports. GDP provides us with a portrait of an economy’s wellbeing, meaning that when GDP is up, the economy is healthy with high employment rates, wage increases, and a rising stock market. For this reason, investors often pay attention to GDP increases or decreases when crafting their investment strategies. What is GNP? GNP, or gross national product, expresses the total value of all goods (products and services) produced by the residents of a particular country, regardless of national borders, thus including their foreign assets. This means that GNP measures the economic activity of a country’s residents, even if that activity does not occur within the national economy. Similarly, it excludes non-residents’ economic activities, even if that activity occurs within the national economy. How Is GNP Calculated? Also known as Gross National Income (GNI), GNP is calculated by adding personal consumption expenditures (including health care), private domestic investment, net exports (goods exported minus those imported), income earned by residents from overseas investments, and government expenditures.
What Is the Difference Between GDP and GNP? The key difference between GDP and GNP is that GNP considers the output of a country’s citizens regardless of where that economic activity occurred. By contrast, GDP considers the activity within a national economy regardless of the residency of the producers. Consider the following situations, which GDP and GNP treat quite differently—the way they treat these situations forms the core of their difference from one another.
Economists and investors are more concerned with GDP than with GNP because it provides a more accurate picture of a nation’s total economic activity regardless of country-of-origin, and thus offers a better indicator of an economy’s overall health. That said, GNP is still important, especially when comparing it alongside GDP from the same year. Learn more about economics and society in Paul Krugman’s MasterClass.
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