If you spend much time listening to politicians or watching financial news programs on TV or on the internet, you’ve undoubtedly heard the terms “GDP” and “GNP”. The terms come up in discussions of the economy or big picture financial matters, and sometimes seem interchangeable. But what are GDP and GNP, and what is the difference between the two?
Both represent an attempt to measure the total economic output of a nation during a given period (usually one year), and serve as barometers to measure both the level and direction of a country’s economic activity.
- GDP, or Gross Domestic Product is calculated either by measuring all income earned within a country, or by measuring all expenditures within the country, which should approximately be the same.
- GNP, or Gross National Product uses GDP, but adds income from foreign sources, less income paid to foreign citizens and entities.
GNP can be either higher or lower than GDP, depending on whether or not a country has a positive or negative result from net foreign inflows and outgo. Though GNP is still calculated, the United States shifted to GDP as its primary economic measure in 1991, in part because most countries in the world use GDP to measure the size and direction of their economies. As a result, GNP numbers are less common than GDP figures.
Both GDP and GNP are complicated, and best summarized in a side-by-side comparison:
Gross Domestic Product – GDP
Gross National Product – GNP
|What is it?||A measure of the total economy of a nation||Same as GDP|
|How it’s calculated||Measuring all income earned within a country, or by measuring all expenditures within the country, which should approximately match||GDP, plus income from foreign sources, less income paid to foreign citizens and entities|
|Why is it important?||It measures both the size and direction of economic activity (growth, stagnation or contraction) – expansions and recessions are based on changes in GDP||Same as GDP|
|Who uses it?||Politicians, economists, large companies (especially multi-nationals)||Same as GDP|
|What does it mean to me?||Shows the relative strength of the nations economy compared to that of other nations; provides a base from which to measure economic changes||Same as GDP|
|What is the GDP/GNP of the US?||$15,684,800,000,000 as of 2012||$15,097,083,000,000 as of 2011|
|Highest/lowest GDP/GNP in the world||
|Per Capita GDP/GNP||The Gross Domestic Product of a country divided by it’s total population||The Gross National Product of a country divided by it’s total population|
|Highest/lowest Per Capita GDP/GNP in the world||
|What is the Per Capita GDP/GNP of the US?||
GDP/GNP Complications in Calculating
If you’re getting the sense that calculating either GDP or GNP is no small task, you’re absolutely right. It’s tough enough to accurately measure the true income of a household or a company, but doing so for an entire country is downright staggering. There are complications beyond simply amassing the data necessary to come up with an accurate figure.
GDP and GNP are calculated based on very specific time periods. But not all the information is available at the same time. This forces the Bureau of Labor Statistics (the agency that reports official GDP in the US) to rely on estimates, resulting in revisions after the fact.
Unreported income is another flaw, and one that is not easily remedied. Individuals may under-report income to minimize income tax liability, which will understate the GDP. This can be a problem between countries as well, since under-reporting of income is more prevalent in some countries than in others.
Still another problem — given that GDP and GNP is often used to measure economic strength from one country to another — is that reporting tends to be less reliable in some countries than in others. This is especially likely in less developed countries, leading to under-estimates of true national economic output.
Nominal vs. Purchasing Power Parity (PPP)
The lack of comparable reporting from one country to another has given rise to two methods of computing either GDP or GNP, nominal and purchasing power parity, or PPP.
Nominal is measuring the size of a nation’s economy on the basis of its economy in local currency, converted to dollars (typically). The conversion is based on currency exchange rates in the currency market.
PPP ignores currency exchange rates, and measures the economy of countries based on the cost of a common basket of goods and services. For example, housing costs more in the US than it does in India, so housing in India will get a boost in compiling GDP or GNP on the basis of PPP.
As a rule, PPP will result in a relatively higher GDP or GNP in a country where costs are lower. PPP adjusts for the fact that a house in the US may cost $200,000, while a similar home in India may be only $50,000. It attempts to even out price variations between countries.
As an example, under nominal, India’s GDP was $1,824,832,000,000 in 2012. Using PPP, India’s GDP was $4,711,000,000,000 in 2012 — or about 2.5 times higher.
What GDP and GNP Don’t Do
It’s important to remember that GDP and GNP are measures of the big picture of a nation’s economy. As a result, there are statistics closer to home that don’t match up with GDP/GNP, particular when we look at per capita figures.
- Personal income. If you look at the chart above, you see that Per Capita GDP in the US is $49,922 for 2012. This should not be confused with anything resembling average income! Per capita GDP is simply the GDP divided by the population of the country. It is not an average wage. According to the Social Security Administration, the average wage was closer to $43,000 in 2012.
- Income distribution. We can look at GDP/GNP numbers to determine the overall economic strength of a given nation, but that number does not indicate the income distribution within the country. A nation could have a relatively high GDP/GNP, or a high per capita GDP/GNP because it has a small number of very large industries (typical of oil producing countries). In this way, high GDP/GNP numbers could mask the fact that the majority of people in a country are relatively poor.
This may be more information on GDP and GNP than you need to know, but the next time the topic comes up…you’ll be prepared.