The two commonly utilized measures for evaluating an economy are GDP and GNP. Both indicate the total market value of every good and service produced over a specific period. However, GDP and GNP are both calculated in different ways. Below, the GDP and GNP are described in detail with their differences.
GDP stands for Gross Domestic Product. The GDP measures the financial value of finished products and services. It counts all the output produced inside a nation’s boundaries. For example, if a US business earns $ 20 million in Japan, that money is included in Japan’s GDP. GDP measures a nation’s prosperity. A high GDP indicates a good economy, while a low GDP indicates a poor economy.
GDP per capita
GDP per capita is the total income of a nation divided by the population of that nation. The GDP per capita indicates the average income people earn in a nation.
GDP growth rate
GDP growth rate is the percentage increase in an economy’s output from one quarter to the next. The growth rate provides accurate data on how fast a nation’s economy is expanding. Agriculture-related services, industry, and service sectors contribute to India’s GDP.
How to calculate a country’s GDP?
The GDP of a country can be calculated by adding up all consumer spending (C), investments (I), government spending (G), and the value of exports minus imports (X-M).
GDP= C + I + G + (X – M)
Three methods for calculating GDP
1. Output method
It calculates the market value of all goods and services generated inside the nation’s boundaries. GDP, as per the output method, is calculated as follows:
GDP = GDP at a constant price – Taxes + Subsidies
2. Expenditure method
It calculates the total amount all entities spend on products and services produced within a nation’s borders. GDP, as per the expenditure method, is calculated as follows:
GDP = Consumer spending + Investments + Government spending + (Value of exports – Value of imports)
3. Income method
It measures the entire income generated by labor and capital inside a nation’s borders. GDP as per income method is calculated as follows:
GDP = GDP at factor cost +Taxes – Subsidies
GNP stands for the gross national product. GNP measures the value of all finished goods and services that a nation’s citizens generate within a specific fiscal year. GNP also measures the value of all the goods and services generated by a nation inside and outside its boundaries. Taxes are included in GNP, but subsidies are not.
For example, if a US business earns $ 20 million in Japan, that money is included in the US GNP. At the same time, if Japan’s business earned $ 10 million in the US, that amount is removed from US GNP.
How to calculate a country’s GNP?
GNP of the country can be calculated by adding up all consumption (C), Investment (I), government spending (G), net exports (X), and net income generated by citizens of the country from foreign investments minus the net income generated by foreign citizens from domestic investments (Z).
GNP = C + I + G + X + Z
Drawbacks of GNP
- The foreign exchange rate changes frequently. Therefore, it affects the computation.
- It is ineffective in deciding whether an economy is increasing or decreasing.
Importance of GNP
- According to economists, GNP is a crucial economic indicator. They utilize it to find solutions to monetary issues like inflation and poverty.
- GNP is a more accurate indicator than GDP when income is determined per person instead of the location.
- The GNP data is utilized to analyze the BoP. BoP stands for balance of payments.
Difference between GDP and GNP
|Definition||GDP measures the total value of goods and services generated inside a country’s borders within a fiscal year.||The GNP is the total value of all the goods and services generated by the nation’s citizens over a fiscal year.|
|Measure||It evaluates domestic production.||It evaluates national production.|
|Focus||It focuses on domestically produced goods.||Its focus is on the output generated by citizens living in various countries.|
|Highlights||It shows the strength of the nation’s economy.||It highlights the contribution of the citizen to boost the nation’s economy.|
|Excludes||The products and services produced by the nation’s citizens residing in other countries are excluded.||Services and products generated by foreign citizens who reside in the country are excluded.|
|The scale of the operations||Local-scale||International scale|