Compare Gross Domestic Product (GDP) and Gross National Product (GNP)

Gross domestic product (GDP) measures the market value of goods and services from production factors such as labor and capital in a country within a given period of time. On the other hand, gross national product (GNP) measures the market value of all final goods produced by factors of production that individuals in a country supply.

Alternatively, GDP can be seen as the value of all goods and services all economic agents in a country produce within a period of time, without excluding foreign economic activities. GNP measures the market value of all production activities carried out strictly by the citizens of a country both within and outside the country, within a fiscal period which could be yearly or quarterly.

Comparing the GDP and GNP of a State

GNP is used to calculate the income generated within a state. This computation factors in income from foreign sources. GDP, on the other hand, strictly measures income generated within a country. As such, GNP is a more accurate measure of a state’s income than GDP. Although GNP uses GDP as a starting point, it can be lower or higher than the GDP itself.

At an international level, GNP tracks the progress of the economy. GDP, to its credit, measures economic growth to weigh the strength of the domestic economy of a country.

Like GDP, GNP factors in depreciation and indirect taxes in the calculation of income. Nevertheless, it does not include the services consumed. The prices of finished products include the value of these services.

The formula of GDP or GNP per capita is dividing the total GDP or GNP by the total population of a country.

GNP is based on the location of ownership, whereas GDP is based on the geographical area of production. Therefore, GDP, unlike GNP, takes the living standards of people in a state into consideration.

The income method, expenditure method, and output method are used to measure GDP. To get the GNP of a nation, simply take GDP and add the net property income from foreigners.

We can summarize the above statements using the table below:

$$
\begin{array}{c|c}
\textbf{Gross Domestic Product (GDP)} & \textbf{Gross National Product (GNP)} \\
\hline
\begin{array}{c} \text{The market value of goods and services in a} \\ \text{country during a specified period of time} \end{array} & \begin{array}{c} \text{The market value of all production activities in a} \\ \text{country during a specified period of time.} \end{array} \\
\hline
\text{Measures only income within a country} & \text{Includes income from foreign sources} \\
\hline
\text{Based on the geographic areas of production} & \text{ Based on the location of ownership} \\
\hline
\text{} & \text{ GDP + Net overseas property income} \\
\end{array}
$$

Question

Which of the following statements is the most accurate regarding both GDP and GNP?

1. Both are based on the location of ownership.
2. Both consider income generated from foreign sources.
3. Both measure depreciation and indirect taxes in the calculation of income.

Solution

The correct answer is C.

Both GDP and GNP use depreciation and indirect taxes in the calculation of income.

A is incorrect. GNP is based on the location of ownership whereas GDP is based on the geographical area of production.

B is incorrect. GDP does not consider income generated from foreign sources.