What is GDP?
GDP stands for “Gross Domestic Product” and represents the total monetary value of all final goods and services produced (and sold on the market) within a country during a period of time (typically 1 year).
- GDP is the most commonly used measure of economic activity.
- The modern concept was developed by the American economist Simon Kuznets in 1934.
- Adopted as the main measure of a country’s economy at the Bretton Woods conference in 1944.
What does “Gross” stand for?
“Gross” indicates that products are counted regardless of their subsequent use. A product can be used for consumption, for investment, or to replace an asset. In all cases, the product’s final “sales receipt” will be added to the total GDP figure.
What is Gross National Income?
GNI (Gross National Income) is a metric similar to GNP, since both are based on nationality rather than geography. The difference is that, when calculating the total value, GNI uses the income approach whereas GNP uses the production approach to calculate GDP. Both GNP and GNI should theoretically yield the same result.
Included in GDP: | Not included in GDP: |
Final goods and services sold for money. Only sales of final goods are counted, because the transaction concerning a good used to make the final good (for example, the purchase of wood used to build a chair) is already incorporated in the final good total value (price at which the chair is sold). | unpaid work work performed within the family, volunteer work, etc.non-monetary compensated work, goods not produced for sale in the marketplacebartered goods and services, black marketillegal activitiestransfer paymentssales of used goodsintermediate goods and services that are used to produce other final goods and services |
Nominal (Current) GDP | Real (Constant) GDP |
face value of output, without any inflation adjustment | value of output adjusted for inflation or deflation. It allows us to determine whether the value of output has changed because more is being produced or simply because prices have increased. Real GDP is used to calculate GDP growth. |
How to calculate GDP
- using the production, expenditure,
- Income approach.
- All methods should give the same result.
GDP Formula
GDP = private consumption + gross private investment + government investment + government spending + (exports – imports).
GDP Per Capita
GDP per capita is calculated by dividing nominal GDP by the total population of a country. It expresses the average economic output (or income) per person in the country. The population number is the average (or mid-year) population for the same year as the GDP figure.
Gross National Income (GNP)
Gross national income is a measurement of a country’s income. It includes
- All the income earned by a country’s residents and businesses, including any income earned abroad.
- Income is defined as all employee compensation plus investment profits.
- It includes earnings from foreign sources.
- GNI also includes any product taxes not already counted, minus subsidies.
- It only counts income earned from residents who work abroad and does not count income earned by foreigners located in the country.
- Like GDP, it also does not include the shadow or black economy.
Difference between GNI and GDP
GNI measures all income of a country’s residents and businesses, regardless of where it’s produced.
Gross domestic product measures the value of goods and services produced within a country, including national output, expenditures, and income.56
GNI equals GDP plus wages, salaries, and property income of the country’s residents earned abroad. It also includes net taxes and subsidies receivable from abroad, according to the Organization for Economic Cooperation and Development.7
Difference between GNI and GNP
GNI measures income earned, including income from investments that flows back into the country.
Gross national product includes the earnings from all assets owned by residents. It even includes earnings that don’t flow back into the country. It then omits the earnings of all foreigners living in the country, even if they spend it within the country. GNP only reports how much is earned by the country’s citizens and businesses, no matter where it is spent in the world.
The components of GDP are personal consumption (C) + business investment (I) + government spending (G) + [exports – imports (X)]
Income Earned by: | GDP | GNI | GNP |
Residents in Country | C+I+G+EX | C+I+G+EX | C+I+G+EX |
Foreigners in Country | Includes | Includes If Spent in Country | Excludes All |
Residents Out of Country | Excludes | Includes If Remitted Back | Includes All |
Foreigners Out of Country | Excludes | Excludes | Excludes |
How GNI is calculated from GDP?
GNI = GDP + [(income from citizens and businesses earned abroad) – (income remitted by foreigners living in the country back to their home countries)].
How GNP is calculated from GDP?
GNP = GDP + [(income earned on all foreign assets – income earned by foreigners in the country)].
Why These Differences Are Important
In many emerging markets, such as INDIA, residents move to other countries where they can earn a better living. They send lots of money back to their families in their home county. This income is enough to drive economic growth. It’s counted in GNI and GNP though not in GDP. As a result, comparisons of GDP by country will understate the size of these countries’ economies.
GNP and GDP both reflect the national output and income of an economy. The main difference is that GNP (Gross National Product) takes into account net income receipts from abroad. GDP (Gross Domestic Product) is a measure of (national income = national output = national expenditure) produced in a particular country.