Gross national product (GNP) refers to the total value of all the goods and services produced by the residents and businesses of a country, irrespective of the location of production.
GNP takes into account the investments made by the businesses and residents of the country, living both inside and outside the country. It also takes into account the value of the products produced by the industries of the domestic origin.
GNP does not take into consideration the incomes earned by the foreign nationals in the country or any products produced by a foreign company in the manufacturing units in the country.
For calculating GNP, only the final goods and services are considered. Intermediate goods are avoided as it leads to double counting.
To calculate the GNP for a nation, the following factors are considered:
- Consumption expenditure
- Government expenditure
- Net exports (Total exports minus total imports)
- Net income (Income earned by residents in foreign countries minus income earned by foreigners in the country)
The mathematical formula for calculating GNP is expressed as follows:
Y = C + I + G + X + Z
GNP = Consumption expenditure + Investment + Government expenditure + Net exports + Net income
GNP considers the manufacturing of goods like equipment, machinery, agricultural products, vehicles as well as some services like consulting, education, and health care.
The cost of providing the services is not calculated separately as it is included in the price of the final products.
GNP per capita is used for the calculation of GNP on a country-to-country comparison, while it becomes problematic when a citizen holds a dual citizenship. In that case, their income is contributed as GNP for each of the respective countries, which leads to double counting.
Importance of GNP
GNP is considered as an important economic indicator by economists. It is used by them for finding solutions to the economic issues such as poverty and inflation.
When income is calculated on the basis of per person irrespective of the location, GNP becomes a much more reliable factor than GDP.
The information obtained from GNP is used for analysing the BoP (Balance of Payments). In some countries or unions, such as the European Union, economists use GNI or gross national income.
Drawbacks of GNP
The following are some drawbacks of GNP:
- The foreign exchange rate fluctuates. Therefore, it impacts the calculation.
- It does not help in determining whether an economy is actually growing or shrinking.
This concludes the important concept of GNP, which is one of the indicators of economic health of a nation. For more concepts on economics for commerce, stay tuned to our website.