Gross National Product (GNP)
Meaning and Definition of Gross National Product
Gross National Product (GNP) can be defined as an economic statistic which includes Gross Domestic Product, plus any income earned by the residents from investments made overseas. Also, the income earned within the domestic economy by overseas residents. As explained by Investopedia, Gross National Product (GNP) refers to a quantification of economic performance of a country. Also, it measures whatever goods and services are generated by the citizens and whether these are produced within the borders of the country.
However, GNP does not discern between qualitative improvements in the state of technical arts, like increasing computer processing speeds, and quantitative increases in goods, like number of computers produced, and considers both as types of “economic growth.”
The concept of gross national product (GNP) was first introduced by economist Simon Kuznets in the 1930s. Kuznets developed the concept as a way to measure the economic output of a country, taking into account not only the production of goods and services within a country's borders (as measured by gross domestic product or GDP), but also the income earned by a country's residents from their economic activities abroad.
Kuznets initially developed the concept of GNP for the United States, and it was later adopted by other countries as a way to measure their economic output. The use of GNP as an economic indicator began to decline in the 1990s, however, as the concept of gross domestic product (GDP) became more widely used as a measure of economic activity. Today, GDP is the more commonly used indicator, although some economists and policymakers still use GNP in certain contexts.
Formula for Gross National Product
The general formula used for Gross National Product is:
GNP = GDP + Net factor income from abroad
GDP = Gross Domestic Product which measures the value of all goods and services produced within a country's borders, including those produced by foreign-owned businesses and individuals.
Net factor income from abroad = income earned in foreign countries by the residents of a country – income earned by non-residents in that country
Why is GNP Required?
The Gross National Product is helpful in measuring the contribution of a country’s residents to the flow of goods and services inside and outside the national territory. Therefore, Gross National Product is the basic concept of national income accounting.
Measurement of GNP
The GNP is measured at:
- Current market prices (Nominal GNP)
This method of estimating the GNP involves measuring the GNP at the prices of goods and services being measured at the prices existing in the market in current year.
- Constant prices (Real GNP)
Through this method, Gross National Product is estimated at a fixed price of a specific base year.
The main steps involved in calculation of GNP are as follows:
- Sum up the total consumer spending, government spending and private investing by the citizens of a given country.
- Calculate the net exports by deducting the exports made by a country’s citizensfrom the total amount of a country’s imports.
Add up the net exports for the citizens of a country to the expenditure by its citizens worldwide thus reaching the GNP.
For example, the US gross national product is measured by the US Bureau of Economic Analysis and includes both private and government consumption, investments and exports, minus imports. The US GNP for 2020 was estimated to be $21.4 trillion.
The GDP of Germany in 2020 was estimated to be €3.4 trillion. This makes it the fifth-largest economy in the world and the largest in Europe. It is measured by the Federal Statistical Office of Germany and includes both private and government consumption, investments, exports, minus imports.