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# 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.

GNP is the sum of the market values of all final goods and services produced by a country's residents within a specific time period, typically a year, including income earned by citizens working abroad but excluding income earned by non-residents within the country.

Let's consider this example. The citizens of Country A own factories and businesses inside and outside its borders. To calculate Country A's GNP, you would need to consider the value of all the goods and services produced by those factories and businesses, regardless of location. If one of the factories is located in another country, 'Country B' for instance, the value of its production would still be included in Country A's GNP, as Country A's citizens own it.

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:

### 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). For a reminder, you can read our explanation: GDP. 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. For example, a$1,000 paycheck in U.S. dollars for a British citizen living in New York City might be converted into £700 one month but only £600 the next month! That's because the value of the U.S. dollar drops due to exchange rate fluctuations.

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:

$$GDP = Consumption + Investment + Government \ Purchases + Net \ Exports$$

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:

$$GNP = GDP + Income \ Made \ By \ Citizens \ Abroad - Income \ Earned \ By \ Foreign \ Nationals$$

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! $$GNP \ per \ capita = \frac{GNP}{Population}$$ The U.S. GNP per capita is: $$\24.6 \ trillion \div 332.5 \ million \approx \74,000 \ per \ capita$$ 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.

## GNP Examples

Examples of GNP involve accounting for the economic production of U.S. companies overseas.

Ford Motor Company, for instance, has factories in Mexico, Europe, and Asia. The profit from these Ford factories would be counted toward the United States' GNP.

For many nations, this seemingly considerable boost to their economic production is somewhat balanced by the fact that many of their domestic factories happen to be foreign-owned.

While Ford may have a global footprint, foreign automakers also have their own factories in the United States: Toyota, Volkswagen, Honda, and BMW, among others.

While the profit from a Ford factory in Germany counts toward the United States' GNP, the profit from a Volkswagen factory in the United States counts toward Germany's GNP. Looking at GNP at this factory level is convenient for understanding, but the proper amount of repatriated income is more difficult to determine.

Foreign citizens usually do not send home all of their wages or investment profits, and foreign-owned companies typically do not send home all of their profits either. A considerable amount of the income made by foreign workers and firms is spent locally in the host country.

Another complication is that major multinational corporations have subsidiaries (branches) in different countries that may seek out domestic investments for their profits rather than sending all profits home.

## Other Measures of National Income

GNP is one of the primary forms a country can measure its national income. However, other methods are used to measure the national income of a nation. This includes Net National Product, National Income, Personal Income, and Disposable Personal Income.

Net National Product is calculated by subtracting depreciation from GNP. Depreciation refers to the loss of the value of capital. So in order to measure the total value of national income, this measure excludes the part of the capital that has worn out as a result of depreciation.

National Income is calculated by subtracting all tax expenses from Net National Produce, with the exception of corporate profit taxes.

Personal income, which is the fourth method of measuring national income, refers to the total amount of income that individuals receive before paying income taxes.

Disposable personal income refers to all the money individuals have in their possession to spend after they have paid income taxes. This is the smallest measurement of national income. Still, it is also one of the most important ones as it shows how much money consumers have at their disposal to spend.

For more on this, read our overview explanation: Measuring the Nation's Output and Income.

## GNP - Key takeaways

• Gross National Product (GNP) is the total value of goods, services, and structures produced by a country's firms and citizens in a year, regardless of where they are produced.
• GNP formula: GNP = GDP + income made by firms/citizens abroad - income earned by foreign firms/nationals.
• While GDP consists of all production of final goods occurring within a nation during one year, regardless of who made it, GNP considers where the income stays.

## References

1. St. Louis Fed - FRED, "Gross National Product," https://fred.stlouisfed.org/series/GNP.
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What is GNP?

Gross National Product (GNP) is defined as the total value of goods and services produced by a country's citizens in a year, regardless of the location of production.

How is GNP calculated?

GNP is calculated by using the formula,

GNP = GDP + income made by citizens abroad - income earned by foreign nationals.

Is GNP a national income?

Yes GNP is a measure of national income.

What are the indicators in GNP?

GNP consists of GDP and a couple of adjustments. GNP = GDP + income made by firms/citizens abroad - income earned by foreign firms/nationals.

What is difference between GNP and GDP?

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

What does GNP stand for?

GNP stands for Gross National Product and it is the sum of the market values of all final goods and services produced by a country's residents within a specific time period, typically a year, including income earned by citizens working abroad but excluding income earned by non-residents within the country.

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