National income is a macroeconomic variable that helps in determining the economic stability of a nation. It represents the total income accrued to a country from all the economic activities in a year.
The most preferred way of calculating the national income involves two concepts, namely GDP and GNP. GDP is known as gross domestic product and GNP is known as gross national product.
What is GDP?
GDP refers to the gross domestic product and is a widely used measure to determine the size of the economy of a nation. It represents the total amount of goods and services produced in a country within a financial year.
The GDP takes the purchases of newly produced goods and services for a particular period into account. In calculating the GDP, the focus is on the total value of goods and services produced within the country borders, irrespective of whether the value addition is due to the residents or non-residents of the country.
Also read about GDP and Welfare
There are two methods of calculating GDP. They are:
- Expenditure approach
- Income approach
The expenditure approach takes into account adding up all the amount spent on goods and services during the period.
GDP = C + I + G + (X – M)
C = Consumption spending
I = Business investments (Capital equipments, inventories)
G = Government purchases
X = Exports
M = Imports
Income approach: Under the income approach, the GDP is calculated by adding up three factors.
GDP = National income + Statistical discrepancy + Capital consumption allowance
Also check: MCQ on GDP Deflator
What is GNP?
GNP is known as gross national product and represents the total value of goods and services produced by the residents of a country during a financial year.
It takes the income earned by the citizens of the country present within or outside the country into consideration. It excludes the income generated by the foreign nationals who are residing in the country. It can be calculated as:
GNP = GDP + NR – NP
GDP = Gross domestic product
NR = Net income receipts
NP = Net outflow to foreign assets
Let us go through the most crucial differences between GDP and GNP in the following table:
|The value of goods and services produced within the geographical boundaries of a nation in a financial year is termed as GDP.||The value of goods and services produced by the citizens of a nation irrespective of the geographical limits in a financial year is known as GNP.|
What Does It Measure?
|It measures only the domestic production.||It measures only the national production.|
|It emphasises on the production that is obtained domestically.||It emphasises on the production that is achieved by the citizens living in different nations.|
|It highlights the strength of the country’s economy.||It highlights the contribution of the residents to the development of the economy|
Scale of Operations
|Local scale||International scale|
|The goods and services that are being produced outside the economy are excluded.||The goods and services that are produced by the foreigners living in the country are excluded.|
This article brings out the major differences between the two important concepts of GDP and GNP that will help to build a strong foundation for the students. Stay tuned to our website for more such knowledge updates.
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