GDP vs GNP

Gross domestic product (GDP) is the value of a nation’s finished domestic goods and services during a specific time period. A related but different metric, the gross national product (GNP), is the value of all finished goods and services owned by a country’s residents over a period of time.

Both GDP and GNP are two of the most commonly used measures of a country’s economy, both of which represent the total market value of all goods and services produced over a defined period.

There are differences between how each one defines the scope of the economy. While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals.

Gross domestic product is the most basic indicator used to measure the overall health and size of a country’s economy. It is the overall market value of the goods and services produced domestically by a country. GDP is an important figure because it gives an idea of whether the economy is growing or contracting.

Calculating GDP includes adding together private consumption or consumer spending, government spending, capital spending by businesses, and net exports—exports minus imports. Here’s a brief overview of each component: Consumption: The value of the consumption of goods and services acquired and consumed by the country’s households. This accounts for the largest part of GDP. Government Spending: All consumption, investment, and payments made by the government for current use. Capital Spending by Businesses: Spending on purchases of fixed assets and unsold stock by private businesses. Net Exports: Represents the country’s balance of trade (BOT), where a positive number bumps up the GDP as country exports more than it imports, and vice versa.

Because it is subject to pressures from inflation, GDP can be broken up into two categories—real and nominal. A country’s real GDP is the economic output after inflation is factored in, while nominal GDP is the output that does not take inflation into account.

When the GDP rises, it means the economy is growing. Conversely, if it drops, the economy shrinks and may be in trouble. But if the economy grows to the point where inflation builds up, a country may reach its full production capacity. Central banks will then step in, tightening their monetary policies to slow down growth. When interest rates rise, consumer and corporate confidence drops. During these periods, monetary policy is eased to stimulate growth.

Gross national product is another metric used to measure a country’s economic output. Where GDP looks at the value of goods and services produced within a country’s borders, GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.

While GDP is an indicator of the local/national economy, GNP represents how its nationals are contributing to the country’s economy. It factors in citizenship but overlooks location. For that reason, it’s important to note that GNP does not include the output of foreign residents.

For example, a Canadian NFL player who sends his income home to Canada, or a German investor who transfers the dividend income generated from her shareholdings to Germany, will both be excluded from GNP. On the other hand, if a US-based news reporter is sent to South Korea and sends her Korean earnings home, or a US-based airline generates income from its overseas operations, they both contribute positively to the country’s GNP.

GNP can be calculated by adding consumption, government spending, capital spending by businesses, and net exports (exports minus imports) and net income by domestic residents and businesses from overseas investments. This figure is then subtracted from the net income earned by foreign residents and businesses from domestic investment.

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