What is Gross National Product (GNP)?

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Definition:

A country’s Gross National Product, or GNP, is the value of all the things a country’s citizens create in a year — regardless of whether it happens within the country's borders or not.

🤔 Understanding gross national product

Gross National Product (GNP) is a measure of economic activity. Unlike Gross Domestic Product (GDP), which is a measure of all economic activity within a country’s borders, GNP measures the value of all the things a country’s citizens produce, regardless of where that production occurs. The GNP statistic includes the work done by citizens that are outside the country and the value created by the owners of factories and equipment located in other countries. However, it excludes the things produced inside a country by foreign workers and owners. In an increasingly global economy, differences between GDP and GNP can be substantial.

Example

In the third quarter of 2019, the Bureau of Economic Analysis estimated that the value of all the goods and services produced in the United States was $21.5T (adjusted to annual values). It also estimated that Americans earned $1.16T in other parts of the world and that $0.85T was earned by foreigners working or investing in the U.S. By subtracting the value of the final goods not produced by Americans, and adding the value that Americans created outside their home country, you can convert the GDP number into GNP — In Q3 2019, the U.S. GNP was $21.8T ($21.54T + $1.16T -$0.85T = $21.85T.)

Takeaway

Gross National Product is like not counting an exchange student’s pay in your household income…

If you want to keep track of your family’s household income, you could include the incomes of everyone who lives under your roof (which is like Gross Domestic Product, or GDP) — or you could include the incomes of everyone who is part of the family (which is like Gross National Product, or GNP). Under GDP, Dad’s, Mom’s, the kids’, and the exchange student’s incomes all count. Under GNP, you leave out the exchange student.

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Why is GNP important?

If you read anything about the U.S. economy from before 1991, you’ll notice that it talks about GNP quite a bit. Back then, the U.S. relied primarily on GNP as the measure of economic output. However, starting in 1991, Gross Domestic Product (GDP) gained in popularity. From that point forward, the Bureau of Economic Analysis switched focus, and GDP became the go-to macroeconomic indicator.

The reason for that switch was two-fold. First, all of the other macroeconomic statistics track what is happening inside the country’s borders. Jobs, wages, income, inflation, unemployment, and others count everyone living in the country. Meanwhile, GNP treats people differently based on their residency. To be consistent across all of the information about the economy, researchers moved to the metric that operates the same way as those other statistics — GDP.

Second, most other countries were using GDP as their gauge of economic health. When comparing the U.S. to other national economies, you have to use the same measuring stick. Therefore, GDP became the primary measurement in the U.S. as well.

You’ll rarely see GNP used anymore. However, it does tell a story that some people find interesting. Because GNP tracks the activity of a country’s citizens, regardless of where they live, it allows researchers to understand how a country’s citizens are doing, rather than its economy. It also sheds some light on how much of the economy is benefiting the citizens that live within the borders, rather than foreign workers living there.

In this way, GNP tells you more about the income of the country, while GDP tells you more about where the jobs are being created. For example, a Mazda (Japanese automaker) plant in Michigan benefits U.S. auto workers and Japanese investors. Likewise, an iPhone manufacturing plant in China provides jobs for Chinese workers but generates income for American owners.

What is the difference between GNP and GDP?

The big difference between these two measures of the economy is how they count things done by foreigners.

Gross Domestic Product (GDP) attempts to measure the market value of all the things produced inside a country’s borders (regardless of who created it) within a specific time frame. This measure includes manufactured products (airplanes, agricultural goods, etc.) and services (education, bookkeeping, etc.) provided within the country’s boundaries.

Conversely, Gross National Product (GNP) cares about the nationality of the person responsible for value creation. This measure attempts to understand the amount of economic activity that the country is responsible for, regardless of where it occurs. Therefore, while GNP also tracks the total value of goods and services that are created, it counts the activities of its citizens and ignores borders.

While GNP does attempt to capture wages earned abroad, the most common source of foreign income is from business profits. For example, if a U.S. owned company were doing business in China, the amount of money sent back to the owners would count toward GNP. Likewise, any wages paid to U.S. citizens working in China would also count.

On the other hand, if a company owned by citizens of the United Kingdom were operating in the United States, the value of the things they produce would count toward the U.S. GDP. But, the money that flows back across the pond would contribute to the U.K. GNP.

How is GNP calculated?

The formula for Gross National Product (GNP) is:

GNP = Consumption + Investment + Government + Net exports + Net foreign income

Where,

Consumption Expenditures (C) is the value of things purchased by households within the county’s borders.

Domestic Investment (I) captures all of the money businesses spend on equipment to produce the goods they sell.

Government Expenditures (G) includes all of the wages paid to public sector employees, as well as some depreciation on public assets.

Net Exports (X) consists of the net effects of international trade. It includes all of the products manufactured in the home country and sold overseas, minus the value of the things that domestic citizens purchase from companies operating outside the country.

Net Foreign Income (Z) adds the income earned by domestic citizens from abroad, then subtracts any foreign income earned within the country.

Other than the last variable, this is the same formula for Gross Domestic Product (GDP). Therefore, the GNP formula is sometimes written as the shortcut equation

GNP = GDP + Z

According to data released by the Federal Reserve Bank of St. Louis, the United States posted a GDP value of $21.5T from July to September of 2019 (adjusted to annual values). Breaking down those numbers looks like this:

What is the difference between GNP and GNI?

Some large organizations, such as the World Bank, use Gross National Income (GNI) rather than Gross National Product (GNP) to compare countries. GNI is often considered a better economic indicator of a country’s income because it considers taxation as well as production.

To get GNI, analysts take GNP and subtract taxes paid by a domestic company to foreign countries, then add taxes collected by the nation on profits earned within its borders.

GNI = GNP – net taxes

What are the weaknesses of GNP?

One challenge is using the Gross National Product (GNP) statistic is that it uses a mix of currencies. Because Gross Domestic Product (GDP) exclusively counts things in one country, everything is calculated in one currency. When adding monetary value created in more than one nation, the value must be converted from the currency of the host country to that of the home country. Thus the exchange rate between the two currencies has an impact on the calculation.

The GNP of a country can change simply because the exchange rate moves. That means that a change in GNP might not indicate that a country’s economy has improved. Therefore, GNP is not a perfect measure of which direction an economy is moving.

Also, GNP captures the value of things created outside of a country of origin. So, GNP can overstate the amount of economic activity that is happening inside the borders. In the extreme, a country could have business owners who outsource all of the manufacturing. The income from that activity would count in the GNP. This number might suggest that the economy is doing well, but all of that value flows to the owners of the company. It would create no wages for domestic citizens. Therefore, GNP could mask some of the income inequality that may be occurring and provide a different picture of the economy to decision-makers than what the country's residents see.

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