GDP vs. GNPDifferences You Need to Know Between the Two!

Written By:
Lisa Borga

Gross domestic product (GDP) and gross national product (GNP) are two metrics often used to measure a country’s economic output.

However, though they both serve to measure the total output of goods and services of a country over a period of time, there are key differences between these two measures.

GDP represents the total value of finished goods and services produced within a country’s borders, whereas GNP measures the value of the goods and services completed by the country’s citizens regardless of their location.

Essentially this means that GDP measures economic output within a country’s borders, whereas GNP measures the economic output of its citizens.

GNP was previously used as the primary measurement tool by the United States for analyzing its economic productivity.

However, it abandoned this measurement in 1991 in favor of GDP, which is far more frequently used by other countries.

Understanding GDP

Gross domestic product or GDP is the most commonly used measure of the value of the economic performance of a country’s economy.

This measurement considers the market value of economic output produced within a country’s borders.

This includes the market value of all goods and services produced or rendered within the country’s territory both by its nationals and others.

GDP provides an indicator of the size of a given country’s economy, which can provide a key indicator of whether a given economy is growing or shrinking.

GDP is found by adding all consumer consumption, spending by the government, capital investments, and net exports (exports – imports).

Here is a closer look at each of these components of GDP:

• Consumer Consumption: This includes the market value of all goods and services consumed by households in a given country. This is the single largest component of GDP.
• Spending By Government: This includes all spending by federal, state, and local governments for goods and services. Military spending, social programs, law enforcement, and more make up this component of GDP.
• Capital Investment: Capital investment includes the purchase of capital goods such as fixed assets. Businesses play the largest role in this sort of investment; however, purchases of new housing by private households are included.
• Net Exports: This component of GDP is found by subtracting the value of all imports of foreign goods from all exports of domestically made goods that are exported to foreigners. This arrives at net exports or the balance of trade which can be positive or negative depending upon the value of imports and exports.

GDP is most often calculated on an annual basis which allows for easy measurement of whether an economy is growing or contracting from year to year.

When GDP increases, this means that the value of output within the country’s borders is growing.

In contrast, if GDP drops, then this indicates that the economy is contracting, which can indicate that the economy of the country in question may be facing significant difficulties.

Though increasing GDP generally is a positive sign, when a country reaches its full production capacity, this may lead to an increase in inflation.

In order to combat inflation, central banks may then intervene and adjust their monetary policy to combat the rising inflation through techniques such as raising interest rates.

This can, in turn, lead to a reduction in consumer and corporate confidence, which can, in turn, be countered through easing monetary policy in order to fuel growth.

Due to the effect of inflation, GDP can be calculated in one of two ways, including nominal and real GDP.

Nominal GDP calculates a country’s aggregate economic output without taking inflation into account, whereas Real GDP measures total economic output while accounting for inflation.

Due to accounting for inflation through the use of constant dollar value, also referred to as real dollar value, real GDP allows for a more accurate measure of economic performance over a longer period of time.

Nominal GDP can be easier to calculate and is often used for comparisons between GDP in different quarters of one year because inflation generally will not have a significant impact over such a short period of time.

A significant advantage of GDP as a tool for measurement is that it makes it much easier to compare multiple economies.

This makes it a valuable tool for making investment decisions and crafting government policies intended to fuel economic growth.

As a result of its use by the majority of foreign economies, the U.S. replaced GNP with GDP as its primary metric for economic activity in 1991 to facilitate international comparison.

Understanding GNP

Gross national product or GNP is another key metric in measuring a country’s economic output.

GNP measures the total value of all goods and services produced by a country’s nationals within the measurement period regardless of their location.

This means that it includes the output of a given country’s citizens and businesses, whether they are located within its borders or abroad.

Whereas GDP measures economic production within certain geographic boundaries, GNP measures how a country’s people contribute to its economy.

This means that GNP includes all of the economic activity contributed by a country’s nationals even when they are abroad but does not include the economic activity of foreign nationals residing within it.

Prior to 1991, this metric was used as the primary method of measurement for economic activity by the U.S. government before being replaced by GDP.

In 1993 the System of National Accounts renamed gross national product with the term gross national income.

However, the method for calculating this metric remains the same.

GNP can be calculated by finding the sum of all consumption, spending by the government, capital investment, and net exports (exports – imports), and the net income of all overseas investments earned by domestic residents minus the net income of all domestic investments earned by foreign residents.

This is similar to the calculation for GDP but with the additional component of accounting for the difference between estimated output by foreign residents within the country and nationals residing outside of it.

Example of GDP Vs. GNP

The GNP of a country can be different than its GDP. Whether it is higher or lower is dependent on the ratio of a country’s domestic production to its foreign production. As an example, in 2020, the GNP for the United States was $21.3 trillion.

Whereas the United States had a GDP of 20.94 trillion. The GNP is larger than the GDP due to the large amounts of production that occur beyond U.S. borders.

Head-to-Head Comparison

• GDP is the total value of the goods and services produced within a country’s borders. In contrast, GNP is the market value of all the final goods and services produced by the citizens of the country.
• GDP takes into account products that are produced within a country’s borders. Whereas GNP considers products that are produced by industries, firms, and companies of the residents of the country. Basically, Gross Domestic Product is based on location. In contrast, Gross National Product is based on citizenship.
• The calculation for GDP considers domestic production. Whereas GNP calculates the production of companies and firms owned by its residents as well as the production of its individual citizens.
• Gross National Product measures the contribution of a country’s residents to the country. Alternatively, Gross Domestic Product measures a country’s economic activity.

Advantages of GNP Over GDP

GNP can be more useful than GDP when measuring how remote workers or businesses located overseas affect the economy of a country. GNP is useful in this situation since it measures the net income made by its citizens from foreign sources.

GNP Versus GNI

GNI stands for Gross National Income. This term was a replacement for Gross National Product in the 1993 System of National Accounts. Both of these are terms for the Gross Domestic Product of a country plus any net income from its citizens abroad.

Are the Metrics Equally Useful?

It is hard to say if the metrics are equally useful. This is really up to the person using them. The GDP is used more often for looking at the productivity of the economy of a country. In the past, GNP was the default measure for evaluating the economic productivity of a country, but it was no longer popular by the 1990s.

Final Thoughts

Gross Domestic Product and Gross National Product are both common metrics for analyzing a country’s productivity. These metrics both measure the value of the economic activity of a country. However, there are differences between the two metrics. The primary difference between the two metrics is that GDP is the monetary value of all the final goods and services produced within the country. In contrast, GNP is the total value of all the final goods and services produced by a country’s citizens during a year, regardless of where the goods and services were produced. The GDP tends to be used more often. But, the values are generally quite similar.

Key Takeaways

• GDP and GNP are both commonly used methods of measuring the value of a country’s total economic output.
• GDP is concerned with the value of economic productivity, which occurs within a country’s borders and includes both nationals of the country and others.
• GNP is concerned with the economic productivity of a country’s nationals both within its borders and outside of them.
• GDP is the most commonly used measure of total economic output internationally and replaced the use of GNP by the United States in 1991 in order to allow for easier comparison between economies.