Difference Between GDP and GNP

If you watch economic news regularly, you must have come across words like GDP and GNP. These are measures of economic activities in any country. GDP stands for Gross Domestic Product and GNP refers to Gross National Product. They both seem to be similar, right? Wrong. Had they been same, they would not have existed together. People are often confused by the difference between GDP and GNP and this article will explain the differences between the two to make a clearer understanding.

GDP is defined as the total value of all the goods and services produced within a country in a given period of time which is usually taken a calendar year. It is calculated in the following manner.

GDP= consumption+ investment+ government spending+ (exports- imports).

GNP on the other hand is the gross national product which is a figure obtained by adding all the income generated by nationals of the country made within or outside the country to the GDP.

Thus the major difference between GDP and GNP is that while GDP takes into account income generated within the country, GNP takes into account income generated by the nationals, whether they are within the country or residing outside the country. The two factors of location and ownership are important to understanding GDP and GNP. If we are talking about the US, if there is an output that takes place within the US irrespective of the ownership, it is included in its GDP. On the other hand, GNP calculates economic output based upon ownership. This is why it takes into account output generated by American companies operating outside the US.

Let us understand the difference by taking up examples. Honda is a Japanese company that has a huge automotive plant in Ohio. The output from this plant is taken into consideration while calculating the GDP of US, but when it comes to GNP which is based upon the concept of ownership, its output is not taken into consideration. Conversely Ford is an American company having a plant in Mexico. As GNP is based upon ownership, its output is included in GNP but when calculating GDP, the output of this Mexican plant is ignored.

Hope this article helped in removing the confusion.