Enrollment for the FMVA™ Certification Program is now OPEN!

Gross National Product

The total value of all goods and services produced by a country’s residents and businesses

What is Gross National Product (GNP)?

Gross National Product (GNP) is a measure of the value of all goods and services produced by a country’s residents and businesses. It estimates the value of the final products and services manufactured by a country’s residents, regardless of the production location. GNP is calculated by adding the personal consumption expenditures, government expenditures, private domestic investments, net exports and all income earned by residents in foreign countries, minus the income earned by foreign residents within the domestic economy. The net exports are calculated by subtracting the value of imports from the value of the country’s exports.

 

Gross National Product (GNP) goods and services

 

Unlike Gross Domestic Product (GDP), which takes the value of goods and services based on the geographical location of production, Gross National Product estimates the value of goods and services based on the location of ownership. It is equal to the value of a country’s GDP plus any income earned by the residents in foreign investments, minus the income earned inside the country by foreign residents. GNP excludes the value of any intermediary goods to eliminate chances of double counting since these entries are included in the value of the final products and services.

 

How to Calculate the Gross National Product?

The official formula for calculating GNP is as follows:

 

Y = C + I + G + X + Z

 

Where:

C – Consumption Expenditure

I – Investment

G – Government Expenditure

X – Net Export (Value of imports minus value of exports)

Z – Net Income (Net income inflow from abroad minus net income outflow to foreign countries)

 

Alternatively, Gross National Product can also be calculated as follows:

GNP = GDP + Net Income Inflow from Oversees – Net Income Outflow to Foreign Countries

 

Where:

GDP = Consumption + Investment + Government Expenditure + Exports – Imports

 

Gross National Product takes into account the manufacturing of tangible goods such as vehicles, agricultural products, machinery, etc., as well as the provision of services like healthcare, business consultancy, and education. GNP also includes taxes and depreciation. The cost of services used in producing goods is not computed independently since it is included in the cost of finished products.

For the year to year comparisons, Gross National Product needs to be adjusted for inflation to produce real GNP. Also, for the country to country comparisons, GNP is stated on a per capita basis. In computing GNP, there are complications on how to account for dual citizenship. If a producer or manufacturer holds citizenship in two countries, both countries will take into account his productive output, and this will result in double counting.

 

Importance of GNP

Policymakers rely on Gross National Product as one of the important economic indicators. GNP produces crucial information on manufacturing, savings, investments, employment, production outputs of major companies and other economic variables. Policymakers use this information in preparing policy papers that legislators use to make laws. The government applies the GNP information in determining the resident’s total income and making policies about savings and policies. Economists rely on the GNP data to solves national problems such as inflation and poverty.

When calculating the amount of income earned by a country’s residents regardless of their location, GNP becomes a more reliable indicator than GDP. In the globalized economy, individuals enjoy many opportunities to earn an income, both from domestic and foreign sources. When measuring such broad data, GNP provides information that other productivity measures cannot produce. If residents of a country would only be limited to domestic sources of income, GNP would be equal to GDP, and it would be less valuable to the government and policymakers.

The information provided by GNP also helps in analyzing the balance of payments. The balance of payments is determined by the difference between a country’s exports to foreign countries and the value of the products and services imported. A balance of payments deficit means that the country imports more goods and services than the value of exports. The government must borrow funds from other countries to pay for its imports. A balance of payments surplus means that the value of the country’s exports is higher than the imports, and this provides enough capital to fund domestic production.

 

GNP vs. GDP

Both Gross National Product (GNP) and Gross Domestic Product (GDP) measure the market value of products and services produced in the economy. The terms differ in what constitutes an economy since GDP measures the domestic levels of production while GNP measures the level of the output of a country’s residents regardless of their location. The difference comes from the fact that there may be many domestic companies that produce goods for the rest of the world, and there may be foreign-owned companies that produce products within the country. If the income earned by domestic firms in overseas countries exceeds the income earned by foreign firms within the country, GNP is higher than the GDP. For example, the GNP of the United States is $250 billion higher than its GDP due to the high number production activities by U.S. citizens in overseas countries.

Most countries around the world use GDP to measure the economic activity in their country. The U.S. used Gross National Product as the primary measure of economic activity until 1991 when it adopted GDP. When making the changes, the Bureau of Economic Analysis (BEA) observed that GDP was a more convenient economic indicator of the total economic activity in the United States. The GNP is a useful economic indicator, especially when measuring a country’s income from international trade. Both economic indicators should be considered when valuing a country’s economic net worth to get an accurate position of the economy.

 

Gross National Income (GNI)

Instead of Gross National Product, Gross National Income (GNI) is used in large institutions such as the European Union (EU), The World Bank, and Human Development Index (HDI). It is defined as GDP plus net income from abroad, plus net taxes and subsidies receivable from abroad. GNI measures the income received by a country’s residents from domestic and foreign trade. Although both GNI and GNP are similar in purpose, GNI is considered a better measure of income than production.

 

Related Readings

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)™ by completing CFI’s online financial modeling classes!