Gross Domestic Product (GDP) is the measure economists typically use to indicate the total size or value of economic production in an economy. There is a similar measure called Gross National Product (GNP). Older readers from the U.S. will probably remember learning something about GNP when they were younger. That’s because until a few decades ago (within this aging author’s memory), GNP was the measure most often cited as the lead measure in the U.S. to describe the health of the economy. That shifted. Now GDP is generally the preferred measure.
So what’s the difference? Well, first let’s look at the similarities. Both GDP and GNP measure “the market value of all goods and services produced for final sale in an economy”. The difference is in how we define “the economy”. GDP focuses on domestic production. In other words, it defines a nation’s economy in geographical terms. Whatever is actually produced inside the country, regardless of who is doing the producing or who owns the productive capital that produces it. In the case of the U.S., it means whatever is produced within the 50 states. GNP however focuses on the production by nationals. In other words, GNP defines the nation’s economy in people or resident terms. It counts whatever is produced by the residents or citizens of a nation regardless of where those people may be doing the producing. In the case of the U.S., this means that GNP measures anything produced by Americans or American-owned capital wherever it may be in the world.
So in practical terms it’s multinational or transnational corporations where the differences arise. Let’s consider the auto industry. If Ford, a U.S. company, produces in cars in Dearborn, MI, then the value of the cars counts toward both GDP and GNP. Similarly, when BMW, a German corporation, builds cars in Germany, it counts towards both German GDP and GNP. But when Ford produces cars in Cologne, Germany, it counts toward U.S. GNP (Ford is American producing in Germany) but not toward US GDP. Instead Ford production in Cologne counts towards German GDP since it is geographically produced in Germany. Likewise, BMW production in Alabama in the States counts toward US GDP and German GNP, but not German GDP. Clear?
Normally the differences between GDP and GNP aren’t that economically significant. Wikipedia reports the differences between the GDP and GNP for the U.S. in 2003 – a difference of less than one-half a percent of the total:
GDP and GNP
Gross domestic product (GDP) is defined as “the value of all final goods and services produced in a country in 1 year”.
Gross National Product (GNP) is defined as “the market value of all goods and services produced in one year by labour and property supplied by the residents of a country.”
As an example, the table below shows some GDP and GNP, and NNI data for the United States:
National income and output (Billions of dollars) Period Ending 2003 Gross national product 11,063.3 Net U.S. income receipts from rest of the world 55.2 U.S. income receipts 329.1 U.S. income payments -273.9 Gross domestic product 11,008.1 Private consumption of fixed capital 1,135.9 Government consumption of fixed capital 218.1 Statistical discrepancy 25.6 National Income 9,679.7
- NDP: Net domestic product is defined as “gross domestic product (GDP) minus depreciation of capital”, similar to NNP.
- GDP per capita: Gross domestic product per capita is the mean value of the output produced per person, which is also the mean income.
Occasionally, though, the differences can be significant and lead to wrong conclusions if the wrong measure is taken. For example, in the case of Ireland in the early 21st century, much of it’s economic growth was actually somewhat of a sham. What appeared to be GDP increases were in fact, the result of fancy acccounting and bookkeeping by several major multinational corporations (notably Google) who wished to take advantage of Ireland’s very low corporate taxes as a way to launder profits earned in other countries before bringing those profits back to their non-Irish home (often the U.S.). In Ireland in 2007, GDP was as much as 23% higher than GNP (source Irish National Accounts) This is means that when that the Irish got to work hard but the fruits of that labor went in large part as profits to foreign owners with no offsetting foreign income available to the Irish. The Irish have once again become laborers for absentee foreign “landlords” (maybe we should call them ”corporatelords”). As Bill Mitchell has noted on his blog at The Celtic Tiger is not a good example and The sick Celtic Tiger getting sicker,
Boone and Johnson offer this interesting insight to further their contention. They show how the growth miracle that led to the “Celtic Tiger” reference was in large part a mirage and driven by major US corporations evading US tax liabilities by exploiting massive tax breaks supplied to them by the Irish government. They conclude that”
… 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies … the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008.
The following graph is taken from the latest Irish National Accounts which cover up to the fourth quarter 2009. Flash estimates for the first quarter 2010 are available but not broken down like this.
The graph shows the difference between Gross Domestic Product (which counts all output produced) and Gross National Product (which exclude the profits of foreign residents) for Ireland. Once you make that correction, then you can see how much worse the domestic contraction has been in the Irish economy.
So GDP was 7.1 per cent lower than in 2008 while GNP was 11.3 per cent lower than in 2008.