Gross National Product

What Is Gross National Product (GNP)?

Economic development measurement is a complex and challenging endeavor. 

Economic growth may be measured in a variety of ways, with some of the most frequent beings:

• Gross National Product/ Gross National Income
• Per Capita Income
• Gross Domestic Product
• Standard of Living

The total value of all completed products and services generated by a country's people/citizens in a particular fiscal year is known as the Gross National Product.

We can say that the GNP is nearly identical to GNI (Gross national income) because the value of the aggregate goods and services is equal to the aggregate national income. Therefore the value remains the same. It is a useful metric for determining a country's degree of economic activity. 

In 1991, the United States switched from GNI to GDP (Gross Domestic Product) as the primary measure of economic production. In simple words, GNP is a superset of GDP. 

GDP limits its analysis of the economy to the country's borders, but GNP broadens it to include net overseas economic activity undertaken by its residents. It shows how a country's people contribute to its economy. In this case, location doesn't matter. 

To avoid duplicate counting, it excludes the value of intermediary commodities included in the value of final products and services.

Both measures can have distinct values because, as we have seen from their definitions, GNP includes some economic activity between local and foreign residents, while GDP doesn't. 

One interesting thing is that the larger the difference between these two, the greater the integration in the company. This will positively impact a country's economy.

Consider a country with a gross national product greater than its gross domestic product. This means that its residents, companies, and corporations are bringing in money through their activities abroad.

As a result, a larger National Product may indicate that a country is expanding its international financial activities, commerce, or production.

Gross National Product Formula

To calculate for the country, the following terms are considered.

• Investment 
• Government Expenditure
• Net Income 
• Net Exports
• Consumption Expenditure

Here we are excluding the intermediate goods produced by the country as it leads to double counting. We can say that The formula is 

GNP = GDP + Net income coming from abroad

From the above formula, one more way to understand it is that it is a piece of economic data that includes the Gross Domestic Product (GDP) and revenue received by citizens from investments abroad.

Or,

GNI = C + I + G + X + Z

Here,

• C = Total consumption
• I = Investment
• G = Government Expenditure
• X = Net exports
• Z = Net factor income from abroad ( domestic residents' net income from overseas investments minus the foreign residents' net income from domestic investments)

While calculating, it considers the various parameters of goods and services. Some of the examples in manufacturing of the goods are:

• Infrastructure
• Vehicles 
• Machinery and equipment
• Metals and chemical products
• Agricultural products

Some of the examples in service industries are:

• Investment advisory
• Healthcare
• Education
• Consulting and advisory
• Hotels and malls

There is one more super important term that you need to understand, and that is GNI per capita. 

Gross national product per capita implies how much a single person contributes on average to the country's economy. We can derive the formula for it.

Gross national product per capita = GNP/population of the country

= (C + I + G + X + Z)/population

It is a very important concept for the country's economy because its use can help predict and calculate the PPP [ Purchasing power parity], overall economy, people's spending habits, poverty, various productions, etc.

It can also be used to make a comparison between the countries.

Example of Gross National Product (GNP)

Let's take a hypothetical situation in which country name X's citizens consume goods and services worth $100 and earn and invest $200. 

The government expenditure for the different projects and a bunch of other activities stands at $400. 

Let the net exports be $600, The overseas income from the citizens of X country be $70, and the income of the foreign institution generated in country X be $20. 

Now, we should first calculate the net overseas income, and it should be $(70-20) = $50. 

Our GNP formula is 

C + I + G + X + Z

By putting the given values, we will get:

= $(100+200+400+600+50) 

= $1350

So we can happily say that country X has a Gross National Product of $1350.

Now, GDP is also somewhat similar; just remove the net income from abroad.

So, GDP = $(1350 - 50) = $1300

Now for GNP per Capita, let us assume the population of the country to be 150

So,

Gross National Product per capita = GNP/Population = 1350/150= $9

Here we can say that, on average, $9 is being produced per person.

You must have heard about the idiom: 'Every coin has two sides. The same is true for it. That is why GDP is more relevant in some cases and vice versa. So let us see the importance and drawbacks one by one. 

Importance of Gross National Product (GNP)

The gross national product (GNP) is a crucial economic indicator that quantifies the entire market value of all the goods and services generated by a nation's citizens during a given time frame, usually a year.

It is significant in a number of ways:

1. Economic Performance

A country's economy is briefly shown by its gross national product (GNP). While a falling GNP may signify economic contraction or stagnation, a rising GNP often denotes economic expansion.

Businesses, investors, and policymakers keep a careful eye on GNP developments to evaluate an economy's state and make well-informed decisions.

2. Standard of Living

A country's standard of living is often determined by dividing its GDP by its population, or GNP per capita. Higher GNP per capita generally correlates with higher standards of living, indicating greater access to goods and services, improved infrastructure, and higher wages for residents.

3. International Comparisons

The GDP makes it possible to compare the economic achievements of various nations. It offers a framework for comparing the relative economic advantages and disadvantages of various countries.

4. Policy Formulation

Governments create economic plans and strategies based on GNP data. For instance, if GNP growth is slow, policymakers may decide to enact stimulus measures to boost economic activity. On the other hand, they might implement measures to avert inflationary pressures if GNP growth is overheated.

5. Resource Allocation

Within an economy, the distribution of resources is aided by GNP data. When deciding which markets to pursue for sales growth or where to build production facilities, businesses rely on GNP statistics to guide their investment decisions.

6. Income Distribution

GNP statistics provide insight into income distribution within a nation. Differences in GNP per capita across various locations or demographic groupings can indicate inequalities in wealth and income.

Policymakers must comprehend these differences in order to develop focused initiatives meant to combat poverty and advance inclusive growth.

Drawbacks of Gross National Product (GNP)

While Gross National Product (GNP) is a widely used measure of economic activity, it does have several drawbacks:

1. Exclusion of Non-Market Transactions

The GNP presents an imperfect picture of the economy since it only takes into account commodities and services that are exchanged in markets, ignoring important non-market activities like housework and volunteer work.

2. Environmental Degradation Ignored

The GNP's failure to account for the environmental costs of economic activity, such as pollution and resource depletion, hides the true sustainability of economic expansion.

3. Ignores Income Distribution

Although GNP per capita is frequently used to gauge prosperity, it ignores differences in the distribution of income, which may conceal serious inequality in a community.

4. Limited Perspective on Quality of Life

GNP ignores variables like happiness, health, and education that are essential for determining the general well-being of society and instead concentrates only on economic output.

5. Vulnerability to Inflation and Price Changes

It can be difficult to fairly evaluate economic performance over time or between nations since GNP numbers are susceptible to inflation and price fluctuations.

6. Absence of Information on Wealth Distribution

While GNP may conceal discrepancies and wealth concentrations, it does not offer insights into how wealth is distributed within a society, which is essential for comprehending social equality and inclusivity.

Gross National Product (GNP) Vs. Gross Domestic Product (GDP)

The gross national product and the gross domestic product (GDP) are two of the most important notions in economics. So, let us look at the major differences between them.

Theoretical Example

Assume that Country A and Country B, two adjacent nations, have comparable degrees of economic growth. A big international company called Company X has its headquarters in Country A but maintains subsidiaries and production facilities in both Country A and Country B.

The following is how GDP and GNP would vary in this case:

1. GDP of Country A

• Regardless of the ownership of the participating companies, the value of all goods and services produced within Country A's boundaries would be included in the GDP.
• Assume that Company X produces $1 billion worth of goods domestically in Country A.
• Furthermore, Country A's subsidiaries of Company X create $500 million worth of goods.
• The sum of these two numbers, or $1.5 billion, would equal Country A's entire GDP.
• Regardless of who owns the generating businesses, Country A's GDP represents the economic activity taking place within its borders.

2. GNP of Country A

• The GNP of Country A, on the other hand, accounts for all of the money that its citizens make, regardless of where on the globe they earn it.
• Since Company X's headquarters are in Country A, that nation's GNP receives all of Company X's revenue, both from domestic and international sources.
• Therefore, the income from Company X's subsidiaries in Country B, let's say $300 million, is included in Country A's GNP in addition to the $1.5 billion from local output.
• As a result, Country A's gross national product (GNP) would be equal to the sum of the revenue produced domestically ($1.5 billion) and the revenue abroad ($300 million) from Company X's subsidiaries.
• Country A's GNP reflects the total income earned by its residents, regardless of whether that income is earned domestically or internationally.

Conclusion

The Gross National Product (GNP) is a crucial indicator of a nation's economic health and international participation.

Compared to Gross Domestic Product (GDP), Gross National Product (GNP) provides a more inclusive perspective by including both domestic and international economic activities carried out by its population.

We may evaluate a country's economic output and its residents' contributions to the global economy using its gross national product (GNP).

It's important to understand GNP's limits, though, as they include the removal of non-market activities and the incapacity to accurately reflect wealth distribution.

Consequently, even while GNP offers insightful information, it should be used in conjunction with other economic indicators to provide a complete picture of a country's economy's state and trajectory.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Financial Economics
• Fiscal Policy
• Gross Domestic Product (GDP)
• Inferior Goods
• National Debt