Examine the modern concept and difference between GDP and GNP.

Examine the modern concept and difference between  GDP and GNP.

Prof. Mahendra Kumar Ghadoliya

Gross Domestic Product (GDP)and Gross National Product (GNP) both measures the aggregate current market value of goods and services produced in a year. GDP refers the production within the boundaries of a nation i.e. produced domestically in the territory of a country e.g. Produced in India whether by Indians or foreigners. The GNP on the other hand measures the production by any Indian persons or firms anywhere in India or outside the country by Indian nationals. The GNP includes the income earned abroad by Indian nationals. GNP is less commonly referred to than GDP but is best described as the measure of national output. Thus, GNP can be either higher or lower than GDP.

GDP Definition

GDP stands for Gross Domestic Product, the total money value of a nation’s production including service sector in a given year.

GNP Definition

GNP: Gross National Product (GNP) is the aggregate current market value of the economy’s output of all final goods and services produced in an open economy in a year.

Both GDP and GNP attempts to measure the same thing, but generally GDP is more  commonly utilised method of measuring country’s economic success but GNP is also useful

GNP is currently produced output during one year: GNP is the measure of currently produced goods and services during a year. One important thing to be borne in mind while calculating GNP is that non-productive transactions are excluded from the calculation of GNP. Non-productive transactions are purely financial transactions or transfer payments like old age pension, unemployment allowance which are merely grants or gifts. Purchasing of shares of already existing companies are also financial transactions and are excluded from the calculations of GNP.

It is a monetary measure of aggregate production: There are n number of heterogeneous goods and services that are produced in an economy. These goods and services are measured in different units. It is therefore difficult to add them without a common measuring rod. Money is such a common measuring yard stick by which thousand of goods and services can be added. Thus monetary value of all these items for the country as whole is called Gross National Product.

Final Goods and Services:  What do we mean by final goods?

Final goods are those goods which are purchased for final use of consumption and are not sold again for further processing. Thus, while calculation the value of goods and services we do not include the value of intermediate goods, only production of final goods and services enters in GNP figures. Market transactions of previously produced goods such as old houses, cars would not enter into GNP.

The following transactions are not included in the Calculation of GNP:

Non-market productive activities: Non-market production such as do it yourself activities, e.g. I do shave daily in the morning, household work  cooking, caring for kids, cleaning and dusting of own house  daily are not a part of GNP calculation

The underground economy: GNP do not measure illegal business activities e.g smuggling, black marketing, gambling, sale of illegal liquor, production of banned drugs are not recorded as a part of GNP estimates. Similarly under reporting income to avoid income tax also remain unrecorded.

Government activities are valued at cost- (i.e. salaried earned by government servants): The reasons are obvious. These activities are not sold in the open market and it is not clear in many cases as how much value was added.

Real v/s Nominal:

It has already been made clear the GDP and GNP are the monetary measures of the productive capacity of a country. The value of money is never constant it keeps on changing with the price level in the country, During inflation when price level is high the GDP or GNP figures are high and during deflation when price level is low the GDP or GNP figures are low. The economists have worked out Real figures by deflating it with price index number. The real GDP thus represents a real rise in the productive capacity. Thus real GDP or GNP is a figure at constant prices where as the GDP or GNP figures at current prices is called the nominal figures.

Real GDP or GNP  =      (Nominal GDP or GNP)/(Price Index Number )×100

Difference between GDP and GNP

• GDP is the production within the geographical boundaries of a nation by all residents in that country (whether citizens or non-citizens). In narrow term, GDP is based on the geographical area of production while GNP is based on the location of ownership. GNP is the production of the citizens of a country, irrespective of their place of living. GDP per-capita tells more about the standard of living of people in a country as compared to the GNP.
• GDP is calculated via three methods namely: Output Method, Income Method, and Expenditure Method. GNP is calculated via GDP plus net income from abroad. GDP is used as the primary measure of production in most of the countries.
• GDP shows the strength of a country’s domestic economy while GNP shows the economic capacity of its nationals.
• GDP focuses on the domestic production while GNP focuses on the production of nationals worldwide.
• Qualitative and quantitative factors in an economy are considered more by the GDP as compared to the GNP. These factors are often overlooked in the case of calculating GNP.
• Just like GDP, GNP also includes the indirect taxes and depreciation in the calculation of income but doesn’t include the services consumed in producing the manufactured products because the value of these services is included in the price of finished products.
• The formula of GDP is: GDP = C + I + G + (X-M) and the formula of GNP is: GNP = GDP + Income earned by Nation from Other Countries – Income Earned by Foreigners from Domestic Market.

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