Answer to Question #141769 in Macroeconomics for Arnab Roy

Question

Rohan is appointed an economics’professor in a reputed university. In his first lecture, students asked him to elaborate on Gross Domestic Product (GDP) and Gross National Product(GNP). Help Rohan to prepare his first lecture on the given topic with relevant example and highlight the differences between the two concepts

Answer 1

Gross Domestic Product (GDP)

Gross domestic product is the total monetary value of all finished goods and services produced within the borders of a country within a specific period. GDP is used to measure the state of the economy of a country by taking into consideration personal consumption, government spending, exports(minus imports), and private investments. Through measurement of the status of the economy, economists can determine whether the economy of a country is growing or going through a recession. GDP is also a key factor in determining the interest rates in an economy by the central bank. Nominal GDP does not factor inflation and deflation rates of a country but is useful when tracking the gradual increase of the value of the economy for a certain period in the international market. Real GDP factors in inflation differences, to avoid assuming that a country is producing more except that it is only the prices that have gone up. Real GDP is most useful when comparing the growth rate of an economy. For example, assume the nominal GDP of a country in 2010 was $200 billion and 2020 the country's nominal GDP has grown to $300 billion. Also over that period, the prices have risen by %100. If you examine the nominal GDP, it would seem like the economy is doing well. But, the real GDP in 2010 would only be $150 billion, showing that there was an overall decline in actual economic performance over this period.

National Domestic Product (NGP)

National domestic product is a measure of the aggregate value of goods and services produced by a country's residents and firms. GNP estimates the total (value of goods and services produced by the residents and businesses without taking into consideration the location where manufacturing took place. GNP is calculated by adding personal expenditures, government expenditures, private domestic investments, net exports (minus imports), and all income earned by the residents in foreign countries, minus the income earned within the domestic economy by foreign residents. GNP can also be calculated by only taking the GDP figure and adding to it the net income of residents in foreign economies. GNP data are annualized and can be adjusted to produce real GNP.

Difference between GDP and GNP

GDP and GNP are related concepts in the sense that they both measure the living standards of different countries. The significant difference between GDP and GNP is that GDP only measures the value of goods and services produced within the borders of a nation. In contrast, GNP measures the value of goods and services produced by residents of a country regardless of the geographical location.

Another difference is that GDP includes goods and services produced by foreigners in the local economy, but GNP excludes them. For example, several foreign companies in the US produce goods and services in the US and revert the incomes to domestic residents. Many US companies produce goods and services in foreign countries and earn profits for their residents.