What is Gross National Product?

The Gross National Product (GNP) is equal to a nation’s economic output its citizens exclusively produce. It covers the foreign income of citizens, but excludes the foreign citizens’ income from domestic investments. It represents what a country’s people make within the country and abroad. For example, an American automobile company, Ford, manufactures and sells automobiles within Europe. It sold close to 1 million vehicles manufactured in its European units in 2019. However, these earnings fall under the US GNP figures, as the earnings are diverted to America.

Let us understand what GNP means in terms of citizenship. People from a particular nation earning in another country fall within the GNP of their home nation. The term Gross National Product indicates that the product stretches national borders and is from across the globe. Thus, wherever a nation’s citizen produces goods, it falls in their home country’s GNP.

For example, consider the Indian citizens working in the USA. Their income is unaccounted for in the US GNP figure. However, the Indian citizens generate the revenue and thus are a part of India’s GNP figure.

How Will You Define GNP?

Gross National Product or GNP refers to the total value of goods and services solely produced by domestic residents. GNP is equal to GDP plus the income of domestic residents from a foreign investment minus foreign residents’ income on domestic investments.

GNP Formula

The gross national product formula used to calculate a country’s GNP is 

GNP = C + I + G + X + Z

where

C = consumption 

I = investment

G = government expenditure

X = net exports (import value – export value)

Z = net Income (income inflow – income outflow).

Another gross national product formula is

GNP = GDP + net inflow income – net outflow income

where

GDP = investment + consumption + government expenditure + exports – imports.

The gross national product considers manufacturing goods like vehicles, machinery, agro products, etc., and services like healthcare, education, and business consultancy. It also includes depreciation and taxes. However, as the manufacturing cost of products is a part of the cost of the finished goods, it is excluded from the calculation.

The gross national product needs to be adjusted for inflation to calculate real GNP every year. For country-wise comparisons, GNP is calculated based on per capita.

The Importance of GNP 

The gross national product is an important economic indicator. Consequently, policymakers rely heavily on GNP. It provides crucial information on significant companies’ savings, manufacturing, investments, production output, employment rates and other essential economic variables. Essential economic variables are economic growth, the balance of payments, unemployment and inflation.

The valuable economic information aids policymakers in preparing policy papers that legislators use for framing laws. In addition, economists solve national problems such as poverty and inflation based on the GNP data.

GNP is a reliable indicator compared to GDP while calculating the citizens’ income regardless of their location. Moreover, with globalisation, individuals benefit from earning an income from local and foreign sources.   

GNP provides information unlike other productive measures for measuring broad data. For example, if residents’ income is limited to domestic sources, GNP equals GDP and is less valuable for the government and policymakers.

The GNP formula also helps calculate the payment balance, which indicates the difference between a country’s import and export values. A country that imports more goods and services than its exports has a balance of payments deficit. In contrast, if the situation is the opposite, it represents a balance of payments surplus.

The Limitations of GNP 

Let us look at some limitations of GNP. 

• Fluctuating exchange rate makes GNP calculation difficult 

The GNP formula calculates a domestic firm’s income from goods sold globally and uses the exchange rate to convert the value into regional currency. The exchange rate fluctuates and causes issues in GNP calculations every year. Countries can solve this limitation by adopting the PPP model of the Purchasing Power Parity (PPP). It allows for differences in the costs of local goods. Even though PPP is a preferable indicator, its reliability is debatable, and its frequency is restricted.

• GNP is not an indicator of economic growth 

GNP equals the total value of produced goods sold by domestic individuals or companies in the domestic and international markets. However, GNP does not provide accurate measurements due to consolidated global markets that each nation derives a significant part of its income from the worldwide market. Thus, growing GBP may reveal increased income abroad but fails to indicate domestic economic growth. 

• Expats contribute to GNP inflation

Expats are foreign nationals residing in a country. Therefore, countries with many expats will have an inflated GNP figure. Thus, such parameters make GNP highly unreliable for calculating the nation’s economic output. 

However, countries with many expats often attract significant amounts of Foreign Direct Investment (FDI) due to cheaper labour rates.

• FDI Causes GNP deflation 

Foreign Direct Investment often leads to a net outflow of Gross National Product.

For instance, Walmart invests in India. Profits are returned to the United States after it has sold products and services. Thus, it drains India’s figures and hikes the US reserves. Indian companies’ foreign investment can counterbalance this scenario. However, that’s not the case.

Developing nations like India significantly differ in the received investment, and the investment delivered abroad. Hence, it results in GNP deflation.

Conclusion

The gross national product is equal to a country’s actual income, whereas the gross domestic product measures an economy’s health. To know what the gross national product of a country is, one needs to calculate the income earned by its citizens and businesses locally and internationally. Although GNP represents a nation’s economic standing, it is not accurate to measure a country’s financial health due to the limitations listed above. Thus, almost all the countries use GDP to calculate their financial strength. However, economists recommend using both indicators to value a country’s economic net worth and get an accurate economic position.