What's the difference between GDP and GNP? - Marketplace (2024)

GDP looks at production that happens within U.S. borders — no matter who does it. GNP looks at economic production by U.S. residents — no matter where they are. Joe Raedle/Getty Images

Gross domestic product plays an outsize role in how we think of what the American economy creates. It’s what the U.S. Bureau of Economic Analysis refers to as its “featured measure of production.” That means it’s thefirst numberthe agencyreports when itreleases economic output data. The featured measure, therefore, determineshow the media, economists and policymakers talk and think about how the country is doing.

GDP accounts for all goods and services produced within the country’s borders. But until 1991, the government used gross national product, or GNP, as its featured measure. Why did it switch?

First, it can be hard to get the difference straight between GDP and GNP.

“It’s confusing, right? National refers to the people, and domestic refers to the area,” said Brad DeLong, an economics professor at the University of California, Berkeley. He also worked for the Treasury Department during the Clinton administration.

If you look at the estimates of economic production the BEA released last week, you’ll see GDP is at the top of Table 1: Line 1, up 3% for the second quarter. Then way down on Line 33, you’ll see another number — gross national product, up 2.6%.

Here’s the difference: GNP looks at economic production by U.S. residents — no matter where they are — emphasis on the who.

GDP looks at production that happens within U.S. borders — no matter who does it — emphasis on the where.

David Wasshausen of the BEA has a couple examples.

“Suppose a U.S. auto company establishes an assembly plant in Mexico,” he said.The production of cars and trucks in Mexico would count toward U.S. GNP, because it’s using labor and capital supplied by U.S. residents.

Meanwhile, “U.S. GDP would not be impacted at all by this activity, because the production occurs outside of the United States,” Wasshausen said.

But if a Japanese carmaker set up a factory in Ohio, that would count toward U.S. GDP because the economic activity took place in the United States.

DeLong of Berkeley said both these measures get at answering a central question: “How rich are we? How rich are we getting as a society, as a community?”

But a century ago, these measures weren’t produced in the U.S. to help answer that.

“One historian writing about this has talked about Herbert Hoover relying on really rudimentary data sources — stock market prices, the amount of cargo being loaded onto freight trains — and basic sources of data like that in order to make national economic policy,” said Angus Burgin, a history professor at Johns Hopkins University and author of “The Great Persuasion: Reinventing Free Markets since the Depression.”

This became a really big problem because the government needed to know the scope of the Great Depression. So, it turned to a young economist named Simon Kuznets and asked him to come up with a system for collecting data on national income — i.e., how much Americans were earning.

Then in the early 1940s, policymakers wanted more information about how much the private and public sectors were producing.

The idea was “to fight a powerful enemy in the Nazis, that have the new technology of air power, which is very costly and devastating, without sending the domestic economy back into recession and even depression,” explained Stephen Macekura, professor of international studies at Indiana University and author of “The Mismeasure of Progress: Economic Growth and Its Critics.”

Macekura said the U.S. likely adopted GNP as its featured measure at this time because there was a lot less cross-border investment then. But as global trade increased, there was a greater push to focus on how much was being produced within the U.S. borders.

“The debates about replacing GNP with GDP really take off in the middle part of the 1980s,” he said.

The BEA switched to GDP in 1991 in part because it made it easier to compare the U.S. economy with others. Many countries had already adopted GDP as their featured measure by this time.

Economist Wasshausen had just started at the BEA when the change happened. He said the agency also wanted its main growth measure to be in line with the other geographic indicators that policymakers — including those at the Federal Reserve — use.

“They are often looking at the economic conditions here within the United States. And so it’s important to have measures that are tracking the economic conditions here within the United States,” Wasshausen said.

But gross national product can answer other questions, said Diane Coyle, a University of Cambridge professor and author of “GDP: A Brief but Affectionate History.”

“If you’re thinking about living standards, actually, in a way, GNP is more interesting,” she said. because it tells you what are the incomes going to be available to people to maintain their standard of living. And it doesn’t really matter if some of those come from overseas.”

In the United States, GNP and GDP track pretty closely together. But Coyle points out there are countries where GDP is much higher.“An example there would be Ireland, which has a very big gap between the two,” Coyle said. A lot of American multinational companies have operations there, increasing the country’s GDP, but then the profits flow back to the U.S., so don’t show up in Ireland’s GNP.

Coyle said it’s worth noting that both GDP and GNP leave things out, including unpaid work in the home and harm to the environment. She said by looking at and trying out other measurements that take different things into account, we can get a fuller picture of how wealthy we really are.

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What's the difference between GDP and GNP? - Marketplace (2024)

FAQs

What's the difference between GDP and GNP? - Marketplace? ›

Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation's borders. On the other hand, gross national product (GNP) is the value of all finished goods and services produced by a country's citizens, both domestically and abroad.

What is the difference between GDP and GNP at market price? ›

GDP is the total value of goods and services produced within a country's borders in a given period. GNP is the total value of all goods and services produced by a country's citizens and companies, regardless of the location. GDP is often used to measure a country's domestic economic activity.

What is the difference between GDP and GNP in marketing? ›

GDP is the total market value of all finished goods and services produced within a country in a set time period. GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad.

What is the main difference between GDP and GNP Quizlet? ›

GDP measures the output produced within the borders of a country, while GNP measures output produced by the citizens of a country. What is a price index designed to measure?

Which is better to use GDP or GNP? ›

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.

What is the difference between real GDP and GDP at market prices? ›

Real GDP is calculated by dividing nominal GDP by a GDP deflator. Unlike real GDP, nominal GDP uses current market prices and doesn't factor inflation into its calculation.

What is GNP at market price? ›

Gross National Product at Market Price, commonly abbreviated as GNP at market price, refers to a measure of economics used to estimate the aggregate final monetary value of all final goods and services produced by residents in any nation, including income that residents have accrued abroad, at prevailing market prices ...

What is an example of a GNP? ›

Examples of GNP involve accounting for the economic production of U.S. companies overseas. Ford Motor Company, for instance, has factories in Mexico, Europe, and Asia. The profit from these Ford factories would be counted toward the United States' GNP.

What is GDP at market price? ›

Gross domestic product at market prices aims to measure the wealth created by all private and public agents in a national territory during a given period. The most key aggregate of national accounts, it represents the end result of the production activity of resident producing units.

How to calculate GDP and GNP? ›

Y = C + I + G + X + Z
  1. C – Consumption Expenditure.
  2. I – Investment.
  3. G – Government Expenditure.
  4. X – Net Exports (Value of imports minus value of exports)
  5. Z – Net Income (Net income inflow from abroad minus net income outflow to foreign countries)

Why is GDP more than GNP? ›

If local enterprises in the country earn more money abroad than foreign firms do at home, the GNP will be larger than the GDP. This is the reason of gross domestic product is higher than the gross national product into an economy.

What is the main difference between the GDP and the GNP of the United States is that GDP includes? ›

GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. An alternative concept, gross national product, or GNP, counts all the output of the residents of a country.

What is the GDP in economics? ›

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period.

Why did the US switch from GNP to GDP? ›

The BEA switched to GDP in 1991 in part because it made it easier to compare the U.S. economy with others. Many countries had already adopted GDP as their featured measure by this time. Economist Wasshausen had just started at the BEA when the change happened.

What are the disadvantages of using GDP or GNP? ›

However, it has some important limitations, including: The exclusion of non-market transactions. The failure to account for or represent the degree of income inequality in society. The failure to indicate whether the nation's rate of growth is sustainable or not.

Is high GNP good for the economy? ›

An increase in GNP is good only in the sense that when money is spent, someone gets it, and that someone is usually happy about it. Whether it is good in the larger, societal sense depends on who spent it, who got it, what it bought, and what parts of the transaction were not accounted for.

What is the difference between GDP and NDP? ›

The net domestic product (NDP) equals the gross domestic product (GDP) minus depreciation on a country's capital goods. Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.

What is the difference between GDP and national income at market price? ›

The domestic product measures all goods and services arising out of economic activity, while national income is the sum of all incomes as a result of the economic activity.

What is the difference between GDP at basic prices and GDP at market prices? ›

The “natural” valuation of the production measure of GDP is basic prices, while the “natural' valuation of the expenditure measure of GDP is market prices. In the SNA it is the production measure that is adjusted (by adding taxes less subsidies on products) to achieve consistency.

What is the difference between GDP at MP and NDP at MP? ›

Depreciation is the decrease in the value of capital goods over time due to wear and tear. In summary, GDP at market price includes all taxes but excludes subsidies, while NDP at factor cost is GDP at market prices minus depreciation.

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