A country’s national income is a measure of all economic and commercial activities. As per a given time frame, this is measured and evaluated in monetary terms. To analyse the current economic health of a country, this is important. Two of the most used methods of analysing the economy are GDP and GNP.
GDP stands for Gross Domestic Product. This defines the total market value of services and products produced within a year. The GNP or Gross National Product defines that market value of goods produced. The profit obtained by a country from abroad is also considered.
It is vital to study both concepts to check the scope of the economic growth of a country. We will delve more into their details in this article.
What is GDP?
GDP states the total monetary value of all the goods and services. These can be produced within the geographical boundaries of a country. This is measured over a specific period. But, the non-residents or residents of the country can be contributors.
GDP helps financial analysts to understand the country's economic growth. If the country is lagging behind, the analysts will understand it through GDP. The statistics will include the expenditure of the consumers, investments, net exports. This will also include government expenditure and paid-in construction costs.
In general, GDP is the measure of the actual economic size of the country. So, it is usually calculated for a year. Financial analysts extend this term to assess the financial trends of the country.
Policymakers take GDP into account when they develop trade policies. It is also important for taking decisions on taxes and interest rates. Moreover, local governments also use GDP. They use it to decide the amount of affordable public spending.
Economists use GDP to analyse fiscal policies. It also helps them predict possible inflation in oil prices and other commodities.
There are three common ways to calculate GDP:
This approach considers the monetary spending of the different people in an economy. The formula is as follows:
GDP = C + G + I + NX
Here, C stands for spending by the consumers or their consumption in the economy. These include services, durable and non-durable goods.
G stands for the expenditures made by the country’s government. These include the investments made and salaries of government employees. It also includes money spent on the construction of roads and schools. Expenses on monuments and military equipment are also considered.
I stands for the total amount of investments made in housing and inventories. Capital equipment is also considered.
NX stands for the value of net exports. This is calculated as the total exports minus the total imports.
The income approach takes into account the total income created by selling goods and services. The formula is as follows:
GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
Here, Total National Income is the sum total of the following:
- wages paid for labour
- money earned as rent from land
- return on investments
- corporate profits
Sales Taxes are the taxes levied by the government on goods and services.
Depreciation is the price assigned to an asset that is tangible. This value is measured over the asset’s useful life.
Net Foreign Factor Income is the difference between the income generated by citizens and companies abroad against the income generated by them within their own country.
Value-added or Production approach
The value-added approach is based on the value that is added to a product or service during production. It is also used to determine the value added to a business. To find this, the price of selling the goods to consumers is taken. This value is subtracted from the price at which it was purchased from the supplier.
Types of GDP
The types of measuring GDP are:
This is the total amount of all the services and goods produced as per the prices of the market.
This is the total amount of all the services and goods produced as per fixed rates of the market.
Potential GDP is a very favourable situation of a country where it has a steady currency rate. In this situation, there is a stabilization of prices of goods. This condition also depicts a 100 % employment rate.
What is GNP?
GNP or Gross National Product looks at the market value of the goods. Products produced both within the country and abroad are considered. This value determines how the citizens contribute to the economy of the nation. But, the output generated by foreign citizens is not taken into account in GNP.
Foreign investments in a country are not considered in GNP. The components of GNP are as follows:
- Government expenditure
- Total consumption
- The net income of the national residents
- Net exports
All these values are summed up. This is subtracted from the profit earned by foreign citizens and companies. This includes profit from investments within the country.
The GNP value of a country depicts how the people of that country perform in foreign countries. The quality and success of the country’s production factors are also analysed this way. Thus, GNP is useful for determining how well the country is economically performing. This helps in comparison with other countries.
The formula for calculating GNP is as follows:
Y = C + I + G + X + Z
Here, Y denotes GNP value.
C stands for the expenditure of consumption.
I denotes the investment value.
G is the expenditure made by the government. This might include money spent on construction and development. Salaries paid to the government employees is also a metric.
X is Net export. By subtracting the value of exports from the value of imports., you will get this value.
Z stands for net income. This is calculated by subtracting the net income going to abroad from the income inflow from abroad.
GNP considers the cost of providing healthcare, education and consultancy services. The manufacturing expenses of heavy machinery, vehicles and technical equipment. Depreciation costs and taxes are also included in GNP.
Inflation is an important factor in the country’s economy. Thus, real GNP is figured out by adjusting GNP with the current rate of inflation.
GNP vs GDP
Basis of comparison
This is the market value of products and services. This is generated within the geographical boundaries of the country
This is the market value of products and services generated by the national within the country or abroad.
Basis of the calculation
The value takes into account the location while calculating the value
The value takes into account the citizenship of the source of income when calculating the value
Citizens producing services and products outside the nation are excluded from the calculation
Foreigners producing services and products within the nation are excluded from the calculation
The value is used for analysing the nation’s economy whether it is expanding or contracting
The value is used for analysing how well the citizens are working to enhance the national economy
Measure of productivity
Productivity is assessed on a local scale
Productivity is assessed on a global or international scale
GDP and GNP are both crucial metrics for assessing a country’s economic output. GDP determines national economic growth. GNP is used t understand how the country’s residents are performing financially domestically and internationally.
Both are important factors in economic forecasting and stabilizing the financial structure of any country.