Gross National Product and Its Differences from Gross Domestic Product
What Does Gross National Product Say About a Country?
Gross national product (GNP) is the value of all goods and services made by a country's residents and businesses, regardless of production location. GNP counts the investments made by U.S. residents and businesses—both inside and outside the country—and computes the value of all products manufactured by domestic companies, regardless of where they are made.
GNP doesn't count any income earned in the United States by foreign residents or businesses, and excludes products manufactured in the United States by overseas firms.
The formula to calculate the components of GNP is Y = C + I + G + X + Z.
That stands for GNP = Consumption + Investment + Government + X (net exports) + Z (net income earned by domestic residents from overseas investments minus net income earned by foreign residents from domestic investments).
GNP Versus GDP
U.S. GNP says a lot about the financial well-being of Americans and U.S.-based multinational corporations, but it doesn't give much insight into the health of the U.S. economy. For that, you should use gross domestic product (real or nominal)—which measures production inside of a country, no matter who makes it. GNP is the same as GDP + Z. That means GNP is a more accurate measure of a country's income than its production.
Examples of GNP vs. GDP
The output of a Toyota plant in Kentucky isn't included in GNP, although it's counted in GDP, because the revenue from the sales of Toyota vehicles goes to Japan, even though the products are made and sold in the United States. It is included in GDP because it adds to the health of the U.S. economy by creating jobs for Kentucky residents, who use their wages to buy local goods and services.
Similarly, the shoes made in a Nike plant in Korea will be counted in U.S. GNP, but not GDP, because the profits from those shoes will boost Nike's earnings and stock prices, contributing to higher national income. It doesn't stimulate economic growth in the United States because those manufacturing jobs were outsourced. It's Korean workers who will boost their country's economy and GDP by buying local goods and services.
These examples show why GNP is not as commonly used as GDP as a measure of a country's economy. It gives a slightly inaccurate picture of how domestic resources are used. For instance, if there were a severe drought in the United States, GNP would be higher than GDP because the foreign holdings of U.S. residents would be unaffected by the drought, unlike the U.S. investments of foreign workers.
GNP is also affected by changes in a country's currency exchange rates. If the dollar weakens, then the foreign holdings of U.S. residents become worth more, boosting GNP. But that may not accurately reflect the state of the U.S. economy. A weaker dollar can eventually boost GDP because it makes exports cheaper, which increases sales and production.
GNP per Capita
GNP per capita is a measurement of GNP divided by the number of people in the country. That makes it possible to compare the GNP of countries with different population sizes.
GNP by Country
The World Bank has replaced GNP with gross national income (GNI). So that GNI can compared more fairly among nations with widely different populations and standards of living, the World Bank uses GNI per capita.
The World Bank also uses the purchasing power parity (PPP) method, which excludes the impact of exchange rates. Instead, it values each nation's output by what it would be worth in the United States.
The CIA Factbook doesn't measure GNP; it only uses GDP. The Factbook notes that in many emerging markets, such as Mexico, money made by residents overseas is sent back to their home countries. This income can be a significant factor in boosting economic growth and would be counted in GNP, but it isn't counted in GDP—which may cause the economic power of these economies to be understated.
The Bottom Line
While GDP is a measure of an economy’s health, GNP tells us about a country’s real income. GNP is the value of all the income earned by a country’s citizens and businesses, regardless of whether they are located in their own country or abroad.
Although GNP reflects the financial standing of a nation, GNP is not an accurate measure of economic health because:
- Foreign exchange rates affect it.
- It does not give an accurate picture of domestic resource usage.
- It is not a good gauge of whether the economy is growing or contracting.
For these reasons, the United States ceased using GNP in 1991 as an indicator and adopted GDP instead. GDP is still commonly used internationally.