GDP vs GNP: Key Differences, Definitions and Examples

A nation’s economic performance becomes clear through analysing multiple metrics, but GDP and GNP function as essential indicators for such analysis. These two measurements of economic output have major distinctions in their operational characteristics.

In this article, we will examine the definitions, calculation methods, and practical applications of GDP and GNP while explaining how policymakers choose one metric over another depending on the situation.

GDP (Gross Domestic Product)

Gross Domestic Product (GDP) represents the complete monetary worth of final products and services produced in national territories during specific periods such as annual or quarterly cycles. Foreign companies doing business in the domestic territory contribute to GDP calculations, but the income of domestic citizens working abroad does not factor into the total.

Components of GDP

The expenditure approach determines GDP through the combination of four core elements.

1. Consumption (C): Households purchase all types of final products through their consumption (C), including all household spending on final goods and services. This ranges from goods like food, clothing, and vehicles to a wide array of services such as healthcare, education, and transportation.
2. Investment (I): Business expenditures on capital goods such as machinery, buildings, and vehicles. Research and development expenses are also included among the spending components.
3. Government Spending (G): Public sector outlays on services like education and defence.
4. Net Exports (NX): The balance of trade emerges as ‘Net Exports’ when exports exceed imports.

Consider a country with consumption worth ₹50 lakh crore, investment worth ₹30 lakh crore, government spending at ₹20 lakh crore, and net exports at ₹5 lakh crore. Their GDP would be:

GDP = 50 + 30 + 20 + 5 = ₹105 lakh crore

As per the official Provisional Estimates, India’s Nominal GDP (GDP at Current Prices) for the fiscal year 2024-25 reached ₹330.68 lakh crore, reflecting a growth rate of 9.8% over the previous year and showcasing continued economic resilience.

What is GNP (Gross National Product)?

GNP (Gross National Product) calculates the complete economic output that results from national residents and business activities no matter where they operate. GNP differs from GDP in its calculation method because it includes domestic resident and corporate earnings from foreign locations but excludes foreign resident earnings in domestic locations.

Formula for GNP

GNP represents GDP with the addition of Net Foreign Factor Income (NFFI) included in the calculation.

GNP = GDP + NFFI

Where:

NFFI stands for the difference between domestic residents’ overseas income and foreign residents’ domestic income.

To illustrate with a hypothetical example, let’s assume a country’s GDP is ₹200 lakh crore. If its residents earn ₹10 lakh crore from abroad, while foreign residents earn ₹5 lakh crore within the country, the NFFI is ₹5 lakh crore.

The GNP calculation would be:

GNP = ₹200 lakh crore + (₹10 lakh crore − ₹5 lakh crore) = ₹205 lakh crore

For India, the official Provisional Estimates for the fiscal year 2024-25 state that the Gross National Income (GNI), the contemporary term for GNP, was ₹328.77 lakh crore.

GDP vs. GNP: Key Differences

The assessment methods between GDP and GNP differ regarding their coverage range and practical usage.

Practical Implications

The government uses GDP statistics as its primary basis for developing domestic policies. The Indian government invests in infrastructure to increase GDP through local industrial growth.

GNP demonstrates how much economic activity a country performs in international markets. The overseas earnings of multinational corporations operating in a country result in higher GNP figures than GDP numbers.

GDP vs. GNP: Formula and Calculation

GDP Calculation Methods

Expenditure Approach

GDP=C+I+G+NX

where,

C - Consumption

I - Investment

G - Government Spending

NX - Net Exports

The Income Approach 

This approach calculates GDP by summing all the incomes earned by households and firms within the country. It operates on the principle that all economic production and spending must translate into an equivalent amount of income for the factors of production (labour, capital, and land).

Production Approach

The value-added accumulation from every step of production makes up the production approach.

GNP Calculation Adjustments

GNP transforms GDP by adding international business income from both inside and outside the country. Let’s say the earnings of Indian IT professionals in the United States (U.S.) amount to ₹2 lakh crore, but American firms operating in India send back ₹1 lakh crore.

GNP would be GDP + (2−1) = GDP + ₹1 lakh crore

Examples of GDP and GNP

Hypothetical Example

Country A has a GDP of $500 billion. Its citizens earn $20 billion from foreign work, while foreign citizens earn $10 billion from domestic work.

GNP = 500 + (20−10) = $510 billion

India’s Real-World Data (2023)

GDP: ₹295.36 lakh crore.

GNP: $3,515.91 billion (₹263.69 lakh crore).

The wide gap stems from the large amount of money sent back home by Indians abroad and the profits earned by Indian companies operating overseas.

Economic Policy and Investment Decisions

Economic policy development and investment decisions heavily depend on the combined power of GDP and GNP. Economic policymakers base their assessment of domestic health on GDP measurements to determine interest rates, tax policies, and infrastructure investments. A high GDP growth rate typically results in more public project funding from the government to maintain economic growth.

A country’s economic stability and growth prospects serve as important indicators to investors who use GDP measurements to make their assessments. A country with a strong GDP attracts foreign capital investment and strengthens its stock market performance. Investors tend to review their investment strategies when GDP shows signs of decline because economic downturns are indicated.

GNP remains an alternative economic indicator that helps assess a country’s worldwide economic power because it measures domestic production beyond borders. Countries with substantial international businesses or large spread populations generally use GNP to measure their total economic presence.

Limitations of GDP and GNP

The assessment of economic well-being faces several restrictions through both GDP and GNP measurement systems.

GDP Limitations

• GDP fails to show how wealth spreads across the population, which keeps major distribution problems hidden.
• The calculation of GDP fails to include environmental damage or resource exhaustion even though these factors reduce long-term sustainability potential.

GNP Limitations

• The measurement of GNP becomes unstable because changes in foreign income do not necessarily represent domestic economic conditions accurately.
• A country that heavily depends on unpredictable foreign earnings through GNP might overstate its economic health because of its strong focus on global income.

GDP and GNP offer complementary insights into economic performance. GNP is the primary indicator for evaluating international economic performance, yet GDP is the main measure for domestic policy decisions. India’s GDP growth strategy supports national development objectives, while rising GNP demonstrates the expanding international power of its citizens. The sustainable development of the economy requires policymakers to maintain equilibrium between these two economic indicators.