What is Gross National Product (GNP)?

//What is Gross National Product (GNP)?
What is Gross National Product (GNP)? 2017-10-04T22:27:19+00:00

Definition: The Gross National Product (GNP) is a measure of a nation’s economic activity by measuring the value of all the finished goods and services produced by a nation’s economy in one year by its nationals.

What Does Gross National Product (GNP) Mean?

What is the definition of gross national product? GNP compares the relative strength of an economy to the relative strength of other economies, providing a base to measure economic changes worldwide. By assigning production based on the location of ownership, the GNP provides an accurate picture of the yearly growth or contraction of an economy based on the volume of economic activity.

The most common way to calculate GNP is summing up government expenditure, net exports, consumer expenditure, and private domestic investment and subtracting the net payment outflows to foreign nationals. The GNP can also be calculated on a per capital basis to measure the purchasing power of consumers and provide an average estimate of wealth and wages in a given society.

The GNP formula is calculated using: GDP = gross domestic product, NR = net income receipts, and NP = net income outflows to foreign nationals.

Let’s look at an example.

Example

A German multinational manufactures cars in the United States. The production of the foreign firm will be accounted to the US GDP. However, the dividends that the German company distributes to shareholders in the US will be included in the US GNP under investments.

Similarly, the dividends that the German company distributes to shareholders in Germany will be excluded from the US GNP as net income outflows to foreign nationals. Likewise, the profit of a US firm that exports its products to Germany will be included in the US GNP as foreign production by U.S. firms.

Therefore:

US GNP = GDP + NR (net income receipts) – NP (net income outflows to foreign nationals.

Net income receipts = consumption + government expenditures + investments + exports + foreign production by U.S. firms

Net income outflows to foreign nationals = domestic production by foreign firms.

Summary Definition

Define GNP: Gross National Product is an economic measurement of a country’s total annual output.