GNP

GDP measures the total amount of goods and services produced within an economy throughout a financial year. It includes goods and services produced by citizens and foreign residents or company owners.

If we were to find out how much total output citizens of the United States make in a given year, which economic metric should we use? How do we account for the output produced by our firms and citizens in other countries? What is the value of total goods and services produced by Americans this year?

That's where GNP comes in. To find out the answer to these questions above, keep reading and get to the bottom of this article.

GNP Definition Economics

Gross National Product (GNP) is defined as the total value of goods and services produced by a country's citizens in a year, regardless of their location.

Economists need to be able to measure the size of the economy. This is frequently measured by total income, which is roughly equal to full production.

Gross National Product, or GNP, is one of the most common measurements of total national income.

It is similar to Gross Domestic Product (GDP) but takes into account the ownership of economic production by the country's residents.

While GDP consists of all production of final goods occurring within a nation during one year, regardless of who made it, GNP considers whether income stays within a country or not.

Although the value of GDP and GNP are similar for most nations, GNP considers the flow of income between countries.

Compared to the GDP figure, GNP adds one thing and subtracts another. For example, the United States' GNP adds foreign investment profit or repatriated (sent home) wages made by Americans abroad and subtracts the investment profit or repatriated wages sent home by foreigners living in the U.S.

For some nations with large numbers of citizens living and working abroad, such as Mexico and the Philippines, there can be a substantial difference between GDP and GNP. Large differences between GDP and GNP can also be found in poorer nations where much output is generated by foreign-owned companies, meaning that production is counted toward the GNP of the foreign owner, not the host nation.

Components of GNP

The Gross National Product (GNP) is based on the Gross Domestic Product (GDP) but with a couple of adjustments. There are four main components of GDP: Personal consumption (C), gross private domestic investment (I), government purchases (G), and net exports (X-M).

However, GNP then takes into account money being sent home by foreign workers or investors and being brought home by its own citizens working or investing abroad. This can be considered a refinement of GDP. GDP only considers all income generated by production within a nation, but it doesn't consider whether that income stays in that nation.

Due to the money transfer between different currencies, GNP can be significantly affected by currency exchange rates. Workers and investors tend to receive their income in the host country's currency and then must convert it to the home currency. Flexible exchange rates mean that the converted value of a monthly paycheck sent home may be considerably different from one month to another, even though the value remains fixed in the host country.

Figure 1. GNP in the U.S., StudySmarter Originals

Using data from Federal Reserve Economic Data (FRED),¹ we've constructed the chart you see in Figure 1. It shows the GNP of the United States from 2002 to 2020. The GNP of the United States has been increasing throughout these years with two exceptions, the financial crisis in 2008 and when Covid hit the economy in 2020.

GNP Formula

To calculate GNP, we must first calculate GDP by adding up the total spending generated by the four sectors of the economy:

Note that the GDP includes all the products that are produced within the nation as it excludes the imports, the product that is produced in other countries. However, GDP does not show the income made by citizens abroad.

Then, from GDP, you must add the value of income and investment profit made by the home country's companies and citizens in other countries. Next, you must subtract the value of income and investment profit made by foreign companies and citizens in your country:

GNP per capita

Just like with GDP, GNP by itself does not reveal the standard of living enjoyed by a country's citizens. We use the per-capita figure to determine how much economic production is created annually on a per person average.

Per capita can be figured for all economy-wide measurements in macroeconomics: GDP, GNP, real GDP (GDP adjusted for inflation), national income (NI), and disposable income (DI).

To find a per capita amount for any macroeconomic measurement, simply divide the macro measure by the size of the population. This helps convert a staggeringly large figure, like the Q1 2022 United States GNP of $24.6 trillion,¹ into a much more manageable number!

The U.S. GNP per capita is:

By dividing the massive U.S. GNP by the country's large population, we get a more understandable figure of approximately $74,000 for our GNP per capita. This means that the income of all U.S. workers and U.S. companies averages out to about $74,000 per American.

While this seems like a large number, it does not mean that this is equivalent to average income. A large chunk of GDP and GNP includes the value of military spending, corporate investment in capital goods like factories and heavy equipment, and international trade. Thus, the average income is considerably lower than GNP per capita.