GNP

Ever wondered about the financial strength of your country and how it's quantified? How do we account for the total value of goods and services produced by citizens at home and beyond? That's where the concept of Gross National Product (GNP) comes into play. But what is GNP exactly? It's an insightful economic indicator that transcends national boundaries, tracking the productivity of a nation's citizens no matter where they are in the world.

Throughout this article, we will unravel the components of GNP, guide you through the steps to calculate GNP and GNP per capita, and offer tangible GNP examples for better understanding. We will also touch upon other measures of national income, broadening your knowledge of economics.

What is GNP?

Gross National Product (GNP) is a measure of a country's economic output that considers the value of goods and services produced by its citizens, regardless of their location. In simple terms, GNP calculates the total value of all products and services created by a country's residents, whether they're inside or outside the country's borders.

It is similar to Gross Domestic Product (GDP) but considers the ownership of economic production by the country's residents.

While GDP consists of all production of final goods occurring in a country during one year, regardless of who made it, GNP considers whether income stays within a country or not.

Although the value of GDP and GNP are similar for most nations, GNP considers the flow of income between countries.

Compared to the GDP figure, GNP adds one thing and subtracts another. For example, the United States' GNP adds foreign investment profit or repatriated (sent home) wages made by Americans abroad and subtracts the investment profit or repatriated wages sent home by foreigners living in the U.S.

For some nations with large numbers of citizens living and working abroad, such as Mexico and the Philippines, there can be a substantial difference between GDP and GNP. Large differences between GDP and GNP can also be found in poorer nations where much output is generated by foreign-owned companies, meaning that production is counted toward the GNP of the foreign owner, not the host nation.

Components of GNP

The Gross National Product (GNP) of a country is calculated by summing up several key components. They are:

Consumption (C)

This refers to the total spending by consumers within a country's borders. It includes the purchasing of durable goods (like cars and appliances), non-durable goods (like food and clothing), and services (like healthcare, education, and entertainment). For instance, if citizens in Country A spend $500 billion on these goods and services, that amount forms part of the country's GNP.

Investment (I)

This is the total amount of spending on capital goods by firms and households. It includes spending on infrastructure, machinery, and housing. For example, if businesses in Country A invest $200 billion in new factories and machinery, this amount is included in the GNP.

Government Spending (G)

This represents the total expenditure by the government on final goods and services, such as infrastructure, public services, and employees' salaries. If Country A's government spends $300 billion on these services, it's also included in the GNP.

Net Exports (NX)

This is the total value of a country's exports minus the total value of its imports. For example, if Country A exports goods worth $100 billion and imports goods worth $50 billion, the net exports component of the GNP would be $50 billion ($100 billion - $50 billion).

Net income from assets abroad (Z)

This is the income earned by the country's residents from overseas investments minus the income earned by foreigners from investments within the country. For instance, if Country A's residents earn $20 billion from investments in other countries, and foreign residents earn $10 billion from investments in Country A, the net income from assets abroad is $10 billion ($20 billion - $10 billion).

Due to the money transfer between different currencies, GNP can be significantly affected by currency exchange rates. Workers and investors tend to receive their income in the host country's currency and then must convert it to the home currency. Flexible exchange rates mean that the converted value of a monthly paycheck sent home may be considerably different from one month to another, even though the value remains fixed in the host country.

Figure 1. GNP in the U.S., StudySmarter Originals

Using data from Federal Reserve Economic Data (FRED),¹ we've constructed the chart you see in Figure 1. It shows the GNP of the United States from 2002 to 2020. The GNP of the United States has been increasing throughout these years with two exceptions, the financial crisis in 2008 and when Covid hit the economy in 2020.

How to Calcualate GNP?

To calculate GNP, we must first calculate GDP by adding up the total spending generated by the four sectors of the economy:

\begin{equation} GDP = Consumption + Investment + Government \ Purchases + Net \ Exports \end{equation}

Note that the GDP includes all the products that are produced within the nation as it excludes the imports, the product that is produced in other countries. However, GDP does not show the income made by citizens abroad.

Then, from GDP, you must add the value of income and investment profit made by the home country's companies and citizens in other countries. Next, you must subtract the value of income and investment profit made by foreign companies and citizens in your country:

\begin{equation}GNP = GDP + Income \ Made \ By \ Citizens \ Abroad - Income \ Earned \ By \ Foreign \ Nationals\end{equation}

The full formula is:

\begin{align*}GNP &=Consumption + Investment + Government \ Purchases + Net \ Exports) + Income \ made \ by \ citizens \ abroad - Income \ earned \ by \ foreigners\end{align*}

How to calculate GNP per capita?

Just like with GDP, GNP by itself does not reveal the standard of living enjoyed by a country's citizens. We use the per-capita figure to determine how much economic production is created annually on a per person average.

Per capita can be figured for all economy-wide measurements in macroeconomics: GDP, GNP, real GDP (GDP adjusted for inflation), national income (NI), and disposable income (DI).

To find a per capita amount for any macroeconomic measurement, simply divide the macro measure by the size of the population. This helps convert a staggeringly large figure, like the Q1 2022 United States GNP of $24.6 trillion,¹ into a much more manageable number!

\begin{equation}GNP \ per \ capita = \frac{GNP}{Population}\end{equation}

The U.S. GNP per capita is:

\begin{equation}\$24.6 \ trillion \div 332.5 \ million \approx \$74,000 \ per \ capita\end{equation}

By dividing the massive U.S. GNP by the country's large population, we get a more understandable figure of approximately $74,000 for our GNP per capita. This means that the income of all U.S. workers and U.S. companies averages out to about $74,000 per American.

While this seems like a large number, it does not mean that this is equivalent to average income. A large chunk of GDP and GNP includes the value of military spending, corporate investment in capital goods like factories and heavy equipment, and international trade. Thus, the average income is considerably lower than GNP per capita.