GNP stands for Gross National Product, which is the combined value of all the final goods and services produced in a country during an accounting year, including net factor income from foreign countries.
Calculation of GNP
GNP can be calculated using the following formula:
GNP= GDP + Net factor income from abroad
GDP = Gross Domestic Product
Net factor income from abroad = difference between income earned in foreign countries by residents of a country and income earned by non-residents in that country.
GNP helps to measure the contribution of residents of a country to the flow of goods and services within and outside the national territory. Hence, GNP is the core concept of national income accounting.
Measurement of Gross National Product
GNP can be measured at:
- Current market prices (Nominal GNP): In this method, the prices of goods and services are measured at prices prevailing in the current year.
- Constant prices (Real GNP): Using this method, GNP is measured at a fixed price of a particular base year.
Real GNP is an effective tool for making yearly comparisons of changes in the physical output of a country, as it is not affected by changing prices. This helps to reflect the economic growth of a country in a better manner.
GNP versus GDP
While GDP is the combined value of all goods and services produced in a country, GNP is a broader concept. It includes the final value of goods and services produced by the residents of a country, irrespective of their geographical location.
For example, if the total value of goods and services produced in a country during a year was $300 million. This includes $25 million produced by foreigners working in that country. Besides, the normal residents of the country settled abroad produced goods and services worth $50 million. In this case, GDP is $300 million, while GNP is $325 million (300-25+50).
Most countries use real GDP (at constant prices) as a primary tool for measuring economic development, as GNP by itself is not an adequate index. This is primarily because the measurement of GNP is generally distorted and inaccurate, since the calculation of income earned by residents of a country outside the nation is complex.