GDP vs. GNP: What’s the Difference?

Reviewed by Michael J BoyleFact checked by Jiwon MaReviewed by Michael J BoyleFact checked by Jiwon Ma

GDP vs. GNP: An Overview

Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation’s borders. On the other hand, gross national product (GNP) is the value of all finished goods and services produced by a country’s citizens, both domestically and abroad.

GDP and GNP are two of the most commonly used measures of a country’s economy. Both represent the total market value of all goods and services produced over a certain period. However, they are calculated in slightly different ways.

These metrics reflect different ways of measuring the scope of an economy. While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals.

Key Takeaways

• Gross domestic product (GDP) and gross national product (GNP) are both widely used measures of a country’s aggregate economic output.
• GDP measures the value of goods and services produced within a country’s borders, by citizens and non-citizens alike.
• GNP measures the value of goods and services produced by a country’s citizens, both domestically and abroad.
• GDP is the most commonly used by global economies.
• The United States abandoned the use of GNP in 1991, adopting GDP as its measure to compare itself with other economies.

Gross Domestic Product (GDP)

GDP is the most basic indicator to measure the overall health and size of a country’s economy. This metric counts the overall market value of the goods and services produced domestically by a country. GDP is an important figure because it gives an idea of whether the economy is growing or contracting.

Calculating GDP includes adding together private consumption or consumer spending, government spending, capital spending by businesses, and net exports—exports minus imports. Here’s a brief overview of each component:

• Consumption: The value of the consumption of goods and services acquired and consumed by the country’s households. This accounts for the largest part of GDP.
• Government Spending: All consumption, investment, and payments made by the government for current use.
• Capital Spending by Businesses: Spending on purchases of fixed assets and unsold stock by private businesses.
• Net Exports: Represents the country’s balance of trade (BOT), or the difference between exports and imports. A positive number indicates that the country exports more than it imports.

Because it is subject to pressures from inflation, GDP can be broken up into two categories—real GDP and nominal GDP. A country’s real GDP is the economic output after inflation is factored in, while nominal GDP does not take inflation into account. Nominal GDP is usually higher than real GDP because inflation is almost always positive.

Nominal GDP is generally used to compare different quarters in the same year because inflation will usually not be a significant factor. The GDPs of two or more years are compared using real GDP.

GDP can be used to compare the performance of two or more economies, acting as a key input for making investment decisions. It also helps the government draft policies to drive local economic growth.

Important

The United States has used GDP as its key economic metric since 1991; it replaced GNP to measure economic activity because GDP was the most common measure used internationally.

When the GDP rises, it means the economy is growing. Conversely, if it drops, the economy is shrinking and may be in trouble. But if the economy grows to the point of reaching full production capacity, inflation may start to rise. Central banks may then step in, tightening their monetary policies to slow down growth. When interest rates rise, consumer and corporate confidence drops. During these periods, monetary policy is eased to stimulate growth.

To draw a parallel, if a family earns $75,000 a year, their spending should ideally remain within their earnings range. It is possible that the family’s spending may overshoot their earnings once in a while, like while buying a house or a car on loan, but then it returns to the limits over a period of time. Longer periods of negative GDP, indicating more spending than production, can cause big damage to the economy. This can lead to job losses, business closures, and idle productive capacity.

Gross National Product (GNP)

GNP is another metric used to measure a country’s economic output. Where GDP looks at the value of goods and services produced within a country’s borders, GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.

While GDP is an indicator of the local or national economy, GNP represents how its nationals are contributing to the country’s economy. It factors in citizenship but overlooks location. For that reason, it’s important to note that GNP does not include the output of foreign residents.

Important

The 1993 System of National Accounts replaced the term GNP with GNI, or gross national income. Both metrics measure the same thing, domestic productivity plus net income by a country’s citizens from foreign sources.

For example, a U.S.-based Canadian NFL player who sends their income home to Canada, or a German investor who transfers their dividend income to Germany, will both be excluded from the U.S. GNP, but they will be included in the country’s GDP.

GNP can be calculated by adding consumption, government spending, capital spending by businesses, net exports (exports minus imports), and net income by domestic residents and businesses from overseas investments. This figure is then subtracted from the net income earned by foreign residents and businesses from domestic investment.

Examples of GDP and GNP

A quick look at the absolute GDP and GNP numbers of a particular country over the past two years indicates they mostly move in sync. There is a small difference between GDP and GNP figures of a particular country depending upon how the economic activities of the nation are spread across the world.

Data Sources: World Bank DataBank.

For instance, many American businesses, entrepreneurs, service providers, and individuals who operate across the globe have helped the nation secure a positive net inflow from overseas economic activities and assets. This bumps up U.S. GNP, making it higher than the GDP of the U.S. for the year 2021.

Saudi Arabia is another instance of a country where GNP is higher than GDP. The Kingdom is a major oil exporter with enterprises and businesses spread around the globe. The income from these enterprises tends to be higher than the income lost due to foreign citizens and businesses operating in Saudi Arabia.

Other nations like China, the U.K., India, and Israel have lower GNP compared to corresponding GDP figures. This indicates these nations are seeing a net overall outflow from the country. Citizens and businesses of these countries operating overseas are generating lesser income compared to the income generated by the foreign citizens and businesses operating in these countries.

The percentage figures in the table above (GNP/GDP-%), which represents GNP as a percentage of GDP, indicate that the absolute difference between the two figures is usually confined within a range of plus or minus 2%. Hong Kong is a notable exception to this rule: as a highly export-oriented economy, many of the city’s business operations are located overseas.

When Is GNP More Useful Than GDP?

Gross national product, or gross national income, records the net income from foreign sources owned by a country’s citizens. This metric may be useful to scholars measuring the effect of overseas businesses or remote workers on a country’s economy.

What Is the Difference Between GNP and GNI?

The 1993 System of National Accounts replaced the term “gross national product” with the new term “gross national income.” Both represent a country’s domestic output plus net income from the businesses or labor of a country’s citizens abroad.

Is GDP or GNP Better?

While there is no objective basis for saying that one metric is better than the other, GDP is the most popular metric for the overall productivity of a country’s economy. GNP was formerly the default measure for a country’s economic production but it fell out of favor by the 1990s.

The Bottom Line

Gross national product (GNP) and gross domestic product (GDP) are among the most popular metrics for the productivity of a country’s economy. Both measure the value of a country’s economic activity. The main difference is that GDP measures productivity within a country’s geographical boundaries and GNP records economic activity by that country’s citizens and businesses, regardless of location. Although GDP tends to be the more popular of the two, their values tend to be about equal.

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