Both GDP (Gross Domestic Product) and GNP (Gross National Product) measure the monetary output of an economy. The main difference between them is that GDP takes into account the monetary value of all products and services produced within a country’s borders, while GNP extends to include the products and services produced by the citizens of a country both within and outside its borders. In simple terms, GNP is a superset of GDP.
In this article, we try to explain these two terms using relevant examples and data.
GDP- The Basic Indicator of a Country’s Economy
Let’s begin with GDP, and then, later on, we can cover GNP
GDP is the total monetary value of all products and services produced within a country’s borders during a certain period of time, usually yearly.
When a newspaper headline says the economy of a country grew by 5% in one year, it simply refers to its GDP growth. This means that the country’s monetary value was 5% higher in that year than the previous year.
GDP is extremely useful in accessing the overall economic growth of a country. For instance, if one needs to know whether a country like America was better off during Bush’s regime than Clinton’s regime, a quick look at GDP figures for those particular periods would provide the necessary information.
GDP is simply based on the concept that a country’s rate of consumption should be similar to its rate of production. While there can be higher consumption, for instance, due to loans borrowed from other countries, the consumption should ideally remain within the production range. If a country has negative GDP (where consumption is higher than the production rate) it can cause significant damage to the economy including the collapse of businesses and loss of jobs.
Mathematically, the GDP of a particular country over a certain period of time is calculated as follows:
GDP= Consumption + Investment +Government Spending + (Exports-Imports)
-Consumption is the value of goods and services consumed by the country’s household;
-Investment is the value of fixed assets and unsold stock purchased by private businesses and households;
-Government Spending is the value of all consumption and investment made by the government for its use on present-day operations, and
-(Exports-Imports) represents the net value of products and services exported out of the country and those imported into the country respectively.
GNP- Gross National Product
GNP, on the other hand, refers to the aggregate value of all products and services produced by the citizens and businesses of a particular country irrespective of their geographical location during a certain period, usually yearly. In simple terms, GNP is a superset of GDP because it factors in both net incomes earned by its citizens from abroad in addition to GDP.
Mathematically, GNP = GDP + (Net income earned by a country’s citizens/ businesses from abroad) – (Net income earned by its foreign residents from domestic incomes/investments)
Let’s put it in simple terms. If a news reporter in the UK is posted to work in South Africa and she sends her income to her country, or a UK- based business generates income from other countries outside the UK, they are both contributing to the GNP of UK.
However, a German investor in the UK who transfers his income to Germany, or an Indian business moving its profits from its factory in the UK to India, will both reduce the GNP of UK.
Simply put, the net sum of profits, dividends, interest and remittances to/from a country is used to calculate the GNP of that country.
The Difference between Nominal and PPP In GDP
GDP, as discussed above is the total monetary value of a country’s monetary output. In short, the total amount of money it makes. GDP per capita is the total monetary output divided by the total population in the country, i.e. the average amount of money each person makes. There are two ways to measure GDP per capita – nominal and PPP (which stands for purchasing power parity).
Nominal is used to measure the economic performance of a country, and to make a comparison with other countries. Let’s say you can buy a cup of coffee for $1 in the US. In India, you can buy the same cup of coffee as well as a sandwich for $1 or approximately Rs. 64. This means the cost of living as well as the purchasing power of India is low. Thus, you can have better living standards in India with the same income you earn in the US.
PPP, on the other hand, is used to compare differences in cost of living between countries. The PPP exchange rate is where the currency of one country is converted into the currency of another country to purchase the same volume of goods and services. For instance, you can buy a cup of coffee in the U.S for $1. In India, you can buy the same cup of coffee for Rs. 20. This means, according to PPP, $1 is equal to $Rs. 20 and not Rs. 64.
GDP and GNP- Key Differences
-While both GDP and GNP measure the economic growth of a country, the geographical scope of GDP covers money earned within its borders limits while GNP extends to money earned in other countries.
-GDP is a measure of a country’s economic growth and stability, while GNP is a measure of the total domestic and foreign output by the residents of a country.