General
Synopsis
If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you. Learn key differences between GDP vs GNP and which better measures true economic health. In the 78th part of this series, Riju Mehta differentiates between the two terms that are used to measure a country’s economic performance.
Getty ImagesJust as a company’s performance is measured using several metrics and indicators, so is a country’s economic performance. Gross domestic product (GDP) and gross national product (GNP) are two crucial metrics that help gauge the health of a country’s economy. These tools help analysts identify economic patterns, make projections and take informed decisions about the country’s future.
General Gross domestic product
This is the total value of goods and services produced in a country within a specified period. In other words, it’s the total economic output of a country, which helps determine whether the economy is growing or shrinking.
GDP is measured as either ‘real’ or ‘nominal’. While real GDP takes inflation into account, nominal GDP doesn’t, calculating the value of goods and services at current market prices. Therefore, real GDP is almost always slightly lower than the nominal GDP.
GDP can be calculated using two approaches: expenditure or income. Most often, however, it is calculated using the expenditure approach according to the following formula.
GDP = C + I + G + (X – M)
Where…
C = Total private consumption of goods and services
I = Total investment
G = Government expenditure on goods and services
X = Exports
M = Imports
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General Gross national product
It calculates the total value of goods and services produced by all the citizens, both in India and abroad, within a specified period. Therefore, it includes both the value of goods and services in the country, as well as the income earned by residents from overseas investments or as income earned abroad.
As in the case of GDP, GNP is measured as real or nominal, with real GNP taking inflation into account, and nominal GNP measured at current market prices. GNP provides a more accurate measure of economic growth.
It is calculated using the following formula:
GNP = GDP + Net income from overseas
– Net income outflow abroad (income earned by foreign residents that’s flowing overseas)
General Lessons from the Grandmasters
