Key Takeaways
- GDP represents the complete monetary value of goods and services produced and sold within a country in a year.
- GNP on the other hand estimates the total value of all goods and services turned out in a given time period via production and are owned by the country’s residents
- GDP can be calculated based either on spending or income.
What is GDP and GNP?
Gross Domestic product, or commonly known as GDP represents the complete monetary value of goods and services produced and sold within a country in a year. It is used to measure the economic activity of a country.
Gross national product (GNP) on the other hand estimates the total value of all goods and services turned out in a given time period via production and are owned by the country’s residents. Any output produced by foreign residents are not included in GNP’s calculations ,along with intermediary goods and services as their value is already incorporated in the final product.
Measuring GDP and GNP
GDP can be calculated in two ways:
- Calculating GDP based on spending
This includes summoung total consumer spending, business investments and government spending and net exports:
GDP = C + I + G + (X-M)
- Calculating GDP based on Income
This calculation is slightly more complicated as it includes all factors of production that make up an economy These include wages, rent, return on capital, profits etc. However, these calculations are not always easy to do because they do not necessarily have the numbers for indirect business taxes, depreciation and foriegn factor income (foreign payments made to the country’s residents less payments those residents made to foreigners):
GDP = National Income + Indirect business tax + depreciation + net foreign factor income
GNP is calculated by summing expenditures pertaining to personal consumption and government, private domestic investment, net exports and income earned by residents from overseas settlements less income earned in domestic economy by foreign residents.
Types of GDP
Nominal GDP – Also known as current GDP, it is the value of output without any adjustment made due to inflation
Real GDP – Also known as constant GDP, it is the value of output after adjustment due to inflation or deflation. It helps us determine whether or not the value of our goods and services changed because more of them have been produced or just because prices have changed. GDP growth is measured by Real GDP.
Limitations of GDP
GDP does not take into account the hidden account which includes unpaid work and inequality in spread of income. A rising GDP could simply result from the richer segments rather than indicating that everyone is doing well. GDP only is not enough to indicate an average person’s living standard.
