Gross National Product – Definition, Formula, Example, Features

Gross National Product – Definition, Formula, Example, Features

Rashmi Karan
Manager - Content
Updated on Apr 11, 2023 15:03 IST

Learn what is GNP, its economic importance, characteristics and formula to calculate the gross national product.

What is GNP? – Gross National Product is a macroeconomic indicator that measures the final production of goods and services generated, in a given time, by a country’s residents and national companies, even if they are abroad.

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The GNP does take into account the concept or term of nationality. For this reason, products made by national citizens or companies are included, and foreign products or services made within the country are excluded.

These products are generated by productive factors (land, capital) of a nation’s residents and reflect in the form of money the flow of goods and services produced by them during a determined period, usually one year.

For example –

Volkswagen, a German automobile company, operates in many countries worldwide. In this case, its overall revenue from the sale of automobiles, irrespective of the country from where it is earning, will be included in the GNP of Germany. The production and sale of automobiles in Germany and other countries will be counted as their GDP.

GNP Calculation

The formula to calculate GNP is:

GNP = C + I + G + X + Z

OR

Where,

C = Consumption

I = Investment

G = Government

X = Net exports

Z = Net income earned by domestic residents from overseas investments (-) Net income earned by foreign residents from domestic investments.

In its calculation, GNP adds public, personal consumption, domestic private investment, net exports, and income earned by nationals abroad. It removes income from foreign residents within the national economy. Furthermore, GNP omits the value of intermediate goods to avoid double counting. These inputs are included in the value of final products and services.

As with the GDP, we must consider that the value of these magnitudes must be done in money. So we will have to correct the possible effects of currency inflation, which is quickly done using reference prices of a specific previous year.

These magnitudes (GDP, GNP) can be compared between different countries.

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Characteristics of the Gross National Product

Macroeconomic indicator: GNP is a macroeconomic indicator that allows analyzing data that reflects the state of a country’s economy.

It focuses on national production. GNP only considers the production factors of the citizens and companies of a specific nation, whether within the country or abroad.

It informs about the production capacity of a country. GNP focuses on the production of individuals or companies of a particular nation. It offers valuable information about the productive competence of its nationals.

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Avoid double calculation: GNP excludes the calculation of intermediate products to avoid double calculation. Since these are calculated on the final value of the product or service. For example, the GNP includes the final price of a vehicle but not those parts purchased separately by the manufacturer, such as tires.

It is measured within a certain period. The production data of goods and services are calculated in a specific period, generally a year.

Economic factors: GNP considers government spending, personal consumption spending, national investment, manufacturing production, intangible goods, agriculture, the income of national residents abroad, and exports, among others.

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What is the GNP used for?

GNP shows us the state of the economy of a specific nation from different aspects.

• It offers indicators to know how the economic growth of a country has been during a specific period.
• It allows for quantifying the total goods and services generated by a nation, its companies, and its citizens.
• It facilitates the formulation of economic policies and regulations.
• It makes it possible to measure and solve economic problems, such as inflation or the growth of poverty.
• It reflects important information about a country’s manufacturing income, investment, or savings.

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Difference Between GDP and GNP

The main difference between GDP and GNP is that GDP considers the total production generated in a territory in a certain period, regardless of whether it is the result of the work of domestic or foreign factors of production. In contrast, the GNP values ​​the production generated by national factors, whether inside or outside the country.

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Therefore, the GDP is based on a geographical criterion, while the GNP considers nationality. Both indicators allow us to attend to different particularities of a country’s economy by offering concrete data on its national production, the presence of foreign capital, or how it behaves as an economy depending on the size of one or the other.

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The Net National Product (NNP)

The NNP is the production of goods and services carried out, in a period, by the country’s nationals. It does not matter whether they are inside or outside the territory, subtracting the consumption of fixed capital.

Therefore, its formula is

NNP = GNP – Consumption of Fixed Capital.

The consumption of fixed capital is the amortization or wear and tear of the country’s economic assets used for production.

How Important is the Gross National Product?

Policymakers consider GNP an important economic indicator. It offers crucial information on manufacturing, saving, investment, employment, production of the leading companies, and other economic variables. Such information is used to prepare policy documents legislators use to make laws. Economists rely on GNP data to solve national problems like inflation and poverty.

Considering all the aspects, GDP is more relevant for macroeconomic analysis. Analysts tend to give GDP more importance to measuring economic growth or decline.

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FAQs

How will you calculate the GNP?

To calculate the GNP, calculate the GDP, add the production of national factors outside the country, and subtract the production of foreigners within the territory.

What is the net national product?

The Net National Product (NNP) is GNP minus the expense destined to cover the depreciation of the capital assets used in production.

What is GNP?

GNP per capita or gross domestic product per capita is the relationship between the total value of all final goods and services generated during a year by the economy of a nation or state and the number of its inhabitants in that year.

Which is bigger GDP or GNP?

When the GDP is greater in a country than the GNP, we speak of a large investment and capital within a country. When it is the other way around, it is clear that the country has a substantial investment abroad.

How does GNP influence the economy?

GNP gives us information on the economic growth indicators of a country at a given moment. It allows for quantifying the total goods and services generated by a country, its companies and its citizens. It helps make decisions about economic and regulatory policies.