Gross Domestic Product (GDP) and Gross National Product (GNP) are two major indicators used to measure a country’s economic performance. Though often used interchangeably, they reflect different aspects of an economy. Understanding their definitions, components, and differences is crucial for assessing which metric provides a more accurate reflection of economic health and progress.
Gross Domestic Product (GDP): It refers to the total monetary value of all final goods and services produced within the geographical boundaries of a country during a specific period, usually a year. It includes the value generated by both domestic and foreign companies operating within the country.
Formula for GDP:
GDP = Consumption + Investment + Government Spending + (Exports − Imports)
For example, if a German car manufacturer produces cars in India, the value of those cars is included in India’s GDP, not Germany’s.
Gross National Product (GNP): It is the total market value of all final goods and services produced by the residents of a country, regardless of where they are located, during a specific time period. It includes the income earned by citizens and businesses abroad and excludes the income earned by foreigners within the country.
Formula for GNP:
GNP = GDP + Net Factor Income from Abroad (NFIA)
(i.e., income earned by nationals abroad − income earned by foreigners domestically)
If an Indian software engineer works in the US and sends money home, that income is part of India’s GNP, not its GDP.
Both GDP and GNP are essential, but the choice of a better indicator depends on the purpose of analysis.
Captures Domestic Economic Activity: It reflects the economic activity within the country’s borders and is a direct measure of local production, employment, and investment.
Policy Formulation: Governments use GDP for planning and designing fiscal and monetary policies.
International Comparisons: Most countries use GDP, making it the global standard for comparing economies.
Large Diaspora or Overseas Investments: In countries like the Philippines or India, where a significant population works abroad, GNP captures the contribution of remittances and foreign investments made by nationals.
Ownership of Capital: GNP is useful in countries with substantial income from overseas assets or foreign businesses.
USA: GDP and GNP are closely aligned because many Americans work domestically and income from abroad is relatively balanced with income paid to foreigners.
India: GNP can be higher than GDP due to large remittances from the Indian diaspora.
Ireland: Its GDP is high due to multinational corporations operating there, but much of the income goes to foreign stakeholders. GNP gives a better idea of income retained by Irish residents.
Ignores Non-Market Activities: Both GDP and GNP ignore household work, volunteer services, and the informal sector.
Does Not Reflect Inequality: A high GDP or GNP does not indicate equitable distribution of wealth.
Environmental Costs: Neither accounts for environmental degradation or resource depletion.
GDP and GNP are vital tools for understanding economic performance, but they serve different analytical purposes. GDP is widely used for measuring domestic economic strength and guiding national policy, while GNP is valuable for assessing the total income generated by nationals, especially in globalized economies.
In most cases, GDP is considered a better indicator for short-term economic performance and policy decisions, while GNP is useful for long-term income assessments and economies with significant cross-border economic activities. Ideally, both should be considered together for a holistic view of economic well-being.