GDP vs GNP

Difference between GDP vs GNP

Gross Domestic Product (GDP) can be defined as the total value of goods and services produced in the country within a certain time period. GDP is the most widely used measure of the size of a particular nation’s economy. GDP only includes the purchases of newly produced goods and services for that time period. It excludes the sale or resale of goods produced in previous periods. Transfer payments such as unemployment, retirement or wealth benefits etc. are also excluded from the calculation of GDP as they do not contribute to the economic output of the country.

Calculation of GDP

GDP of any country can be calculated by 2 methods: –

1. Expenditure Approach: –

Under the expenditure approach, GDP is calculated by summing up the amount spent on goods and services produced during the period.

GDP = C + I + G + (X-M)

where:

C = Consumption spending

I = Business investment (capital equipment, inventories)

G = Government Purchases

X = Exports

M = Imports

2. Income Approach: –

Under the income approach, GDP is calculated by summing the following three factors –

GDP = National Income + Capital Consumption Allowance + Statistical Discrepancy

National income is the sum of the income received by all factors of production that go into the production of the final output.

National income = Compensation of employees (wages and benefits)

+ Corporate and government enterprise profits before taxes

+ Interest income

+ Unincorporated business net income (business owners’ incomes)

+ Rent

+ Indirect business taxes – subsidies (taxes & subsidies included in final prices)

Capital consumption allowance (CCA) measures the depreciation of physical capital from the production of goods and services over a period. CCA can be thought of as the amount that has to be reinvested to maintain the productivity of physical capital from one period to the next. The statistical discrepancy is an adjustment for the difference between GDP measured under the income approach and the expenditure approach because they use different data.

Gross National Productivity (GNP) is similar to GDP but measures the total value of goods and services produced by the labour and capital of a country’s citizens. The difference is due to non-citizen incomes of foreigners working within a country, the income of citizens who work in other countries, the income of foreign capital invested within a country and the income of capital supplied by its citizens to foreign countries. The income to capital owned by foreigners invested within a country is included in the domestic country’s GDP but not in its GNP. The income of citizens of a country working abroad in other countries is included in its GNP but not in its GDP.

GNP = GDP

+ Overall net income of domestic residents or businesses earned from foreign investments)

– Overall net income of foreign residents or businesses earned from domestic investments)

For example: – If an Indian cricket player plays in English County league and he sends his British pound earnings to India it will contribute positively to the GNP of India.

However, if an Australian player plays in Indian IPL and is sending his income back to Australia, it will reduce the GNP of India.

GDP vs GNP Infographics

Below is the top 6 difference between GDP vs GNP

Key differences between GDP vs GNP

Both GDP vs GNP are popular choices in the market; let us discuss some of the major Difference Between GDP vs GNP :

• GDP measures the total value of goods and services produced in a country within a certain time period while GNP measures the total value of goods and services produced by the labour and capital of a country’s citizens.
• GDP is calculated using expenditure and income approaches. Under the expenditure approach, GDP is calculated as

GDP = C + I + G + (X-M)

Income approach for calculation of GDP: –

GDP = National Income + Capital Consumption Allowance + Statistical Discrepancy

While GNP is calculated as: –

GNP = GDP + Income earned by domestic residents/businesses in foreign countries – Income earned by foreign residents/businesses in domestic country

• GDP measures productivity on a local scale while GNP measures productivity on an international scale.
• GDP is calculated on basis of location while GNP is calculated on basis of citizenship
• The primary focus of GDP is on domestic production while the primary focus of GNP is on production by labour and capital by country’s nationals i.e. individual or corporations
• GDP highlights the strength of a country’s economy while GNP highlights the contribution of residents of a country to the economy of the country.
• Due to various accounting standards followed across the globe and different requirements of foreign exchange conversion, there may be accounting issues during calculations of GNP while calculation of GDP does not face such computational challenges and remain steady.

Head To Head Comparison Between GDP vs GNP

Below is the topmost comparison between GDP vs GNP

Conclusion – GDP vs GNP

In this GDP vs GNP article, we have seen both GDP vs GNP which are the strength of an economy. But the differentiating factor between them is, GDP determines what is produced within the borders of a domestic country while GNP determines the production of goods and services by the nationals of a country even if it is outside the borders of a domestic country.

GDP remains the most popular method of measuring a country’s economic growth but GNP is being utilized more and more due to globalization and technology driving the rapid expansion of business activities around the globe both by individuals and businesses. Both GDP vs GNP factors are being considered by policymakers while determining the strength of the economy.

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