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 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.
GDP takes into account the purchases of newly-produced goods and services for a particular period. In calculating 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 residents or non-residents of the country.
Also Read about GDP and Welfare
There are two methods of calculating GDP
- Expenditure Approach
- Income Approach
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 investment (capital equipment, 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 it represents the total value of goods and services produced by the residents of a country during a financial year.
GNP takes into consideration the income earned by the citizens of the country present within or outside the country. It excludes the income generated by foreign nationals who are residing in the country. GNP 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 the 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 a citizen of a nation irrespective of geographical limits in a financial year is known as GNP|
What does it measure?
|Measures only domestic production||Measures only the production by nationals|
|Production that is obtained domestically||Production that is achieved by citizens living in different nations|
|GDP highlights the strength of the country’s economy||GNP highlights the residents’ contribution to the development of the economy.|
Scale of operations
|Local Scale||International Scale|
|Goods and services that are being produced outside the economy.||Goods and services that are produced by foreigners living in the country.|
This article brings out the major differences between the two important concepts of GDP and GNP that will help build a strong fundamental for the Commerce students. Stay tuned to BYJU’S for more such knowledge updates.
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