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What Is GDP?
GDP, or gross domestic product, measures the total economic value of all final goods and services produced within a country’s borders during a specific period of time. An expression of an economy’s relative health—an increase in GDP indicates a country’s economy is growing and a decrease that it is shrinking—GDP is used by economic policymakers, in the United States, and across the world, to determine interest rates and other economic policy.
There are two types of GDP:
- Nominal GDP is a country’s economic output at current total market value, meaning that it is often shaped as much by currency inflation as it is by increased economic output.
- Real GDP is a country’s output adjusted for inflation. By comparing the year under study to a base year and keeping prices consistent across both, economists isolate and then remove inflation from the equation, providing a more accurate picture of a nation’s actual increases or decreases in economic output.
How Is GDP Calculated?
GDP is calculated in one of two ways: the income approach, and the expenditure approach. Though the latter is by far the more popular way to measure GDP, both methods should arrive at roughly the same number.
- In the income approach, also known as GDP(I), economists add employee compensation, gross profits, and taxes minus subsidies to arrive at a figure representing the income an economy generates.
- In the expenditure approach, economists add total consumption, investment, government spending, and net exports.
- GDP provides us with a portrait of an economy’s wellbeing, meaning that when GDP is up, the economy is healthy with high employment rates, wage increases, and a rising stock market. For this reason, investors often pay attention to GDP increases or decreases when crafting their investment strategies.
What is GNP?
GNP, or gross national product, expresses the total value of all goods (products and services) produced by the residents of a particular country, regardless of national borders, thus including their foreign assets.
- This means that GNP measures the economic activity of a country’s residents, even if that activity does not occur within the national economy. Similarly, it excludes non-residents’ economic activities, even if that activity occurs within the national economy.
How Is GNP Calculated?
Also known as Gross National Income (GNI), GNP is calculated by adding personal consumption expenditures (including health care), private domestic investment, net exports (goods exported minus those imported), income earned by residents from overseas investments, and government expenditures.
- Because it is only concerned with the economic output of a country’s residents, the income earned in the domestic economy by foreign residents is then subtracted from this sum.
- Thus, under GNP, production of goods can occur anywhere in the world—as long as the means of production is owned by a resident of the country under study, these goods count towards GNP.
- GNP is closely related to Net National Product (NNP), which calculates the value of all finished goods and services produced by a country’s residents minus the amount of capital required to produce these goods such as raw materials, energy costs, and so on.
What Is the Difference Between GDP and GNP?
The key difference between GDP and GNP is that GNP considers the output of a country’s citizens regardless of where that economic activity occurred. By contrast, GDP considers the activity within a national economy regardless of the residency of the producers.
Consider the following situations, which GDP and GNP treat quite differently—the way they treat these situations forms the core of their difference from one another.
- The net income receipts of foreign companies owned by foreign residents that produce goods in the country under study. Since GNP only considers citizens of a country and their economic output, it does not include such companies in its measurement. However, GDP measures economic output regardless of country of residence—so it does include such companies in its measurement.
- Companies owned by domestic residents producing goods for global consumption. Think about companies like Apple, which produce goods for sale on the global economy and often remit their profits to places with favorable corporate tax laws like Ireland. Since GNP considers any and all output of domestic residents, it includes these companies and their economic activity occurs outside the country. However, GDP only measures the economic output of a given nation’s economy, so it does not consider this international activity, nor the money remitted to foreign economies.
- Similarly, GNP will always include net income receipts from the international investments made by its residents whereas GDP will not. Conversely, GDP will always include foreign investments within a country’s borders, whereas GNP will not.
Economists and investors are more concerned with GDP than with GNP because it provides a more accurate picture of a nation’s total economic activity regardless of country-of-origin, and thus offers a better indicator of an economy’s overall health. That said, GNP is still important, especially when comparing it alongside GDP from the same year.
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