Subject 1. GDP vs. GNP

GDP is the total market value of all domestically produced final goods and services for a particular year. Its five key factors are: market value, final goods and services, produced, within a country, during a specific time period.

  • Only final goods and services count: GDP includes goods and services purchased by final users. Intermediate goods purchased for resale or for the production of another good or service are excluded, to avoid double-counting. Their value is embodied in the value of the goods purchased by the end user.

  • GDP is a "flow" variable; it measures the market value of production that flows through the economy.

  • Financial transactions and income transfers (e.g., social security and welfare payments) are excluded because they represent exchanges, not productions, of goods and services. GDP counts transactions that add to current production.

  • GDP counts only goods and services produced domestically, whether by citizens or foreigners.

  • It includes only goods produced during the current period. Thus, sales of used goods are not counted in GDP. However, sales commissions count toward GDP because they involve services provided during the period.

GNP is the total market value of all final goods and services produced by the citizens of a country. It measures the output that is produced by the "nationals" of a country. This figure is the output generated by the labor and capital owned by the citizens of the country, regardless of whether that output is produced domestically or abroad. Consider the case of the United States. GNP is the income earned by Americans, regardless of whether that income is earned in the United States or abroad. It omits the income foreigners earn in the United States, but counts the income that Americans earn abroad. It is equal to GDP minus the net income of foreigners.

GNP = GDP + Income received by citizens for factors of production supplied abroad - Income paid to foreigners for the contribution to domestic output

In short, GNP measures the worldwide output of a nation's citizens while GDP measures the domestic output of the nation.

  • In general, the bulk of output is produced domestically using resources owned by nationals of the country. Thus, GDP often differs only slightly from GNP.
  • These two measures differ substantially only when a country attracts a large number of foreign workers or investments (the country's GDP will exceed its GNP).
  • If a relatively large number of a country's citizens work abroad, or its citizens have made substantial investments abroad, the country's GNP will exceed its GDP.

User Contributed Comments 4

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Shaan23: Seems like people have just quit on Global trading section. There's barely any comments throughout these sections.

This is how the CFA will be passed or failed. Dont SKIP. It's an easy section. Dont just stop when you get near the end of chapters.
Inaganti6: Or they've chosen not to comment here....gotta critique those underlying assumptions ....a lapse in critical thinking skills hadn't been good for anyone
ashish100: ...........
mvferri: tensions absolutely FLARING in the comment section