When we talk about economic growth, we generally refer to growth in terms of gross domestic product, or GDP. But when we talk about growth of national income, we most commonly refer to growth in terms of gross national product or GNP.
Illustration: Jayachandran / Mint
So, is there any difference between GDP and GNP? Yes. All roads leading to growth in GDP may not necessarily lead to growth in GNP. Only in a rare situation would the GDP and GNP figures of a country be the same. Otherwise, we mostly see economies where GDP and GNP differ.
Jinny: Hi, Johnny! You look different today. Seems you have got a new hairstyle.
Johnny: I thought I would also contribute to our GDP growth. Remember our earlier discussion where you had said that getting a haircut or using a laundry service leads to growth in GDP?
Jinny: Yes, I do. I think that day, apart from telling you about GDP, I should have also told you about GNP.
Johnny: GNP? What is that?
Jinny: Well, as you already know, GDP represents the total value of all goods and services produced within the boundaries of a country during a year. While counting GDP, it is immaterial who owns the means of production. Whatever is
produced within the boundaries of a country is counted as part of that country’s GDP. The rule is simple. If your neighbour’s hen lays eggs within the boundaries of your farm, you count its value as part of your farm produce. Likewise, the value of goods and services produced by factors owned by foreigners within our national boundary is treated as part of our GDP.
However, in calculating GNP, boundary is immaterial, and ownership of factors of production is taken into account. Who owns the hen? The rule for counting GNP is that the owner is always entitled to take away the profit. Your neighbour can pay you rent for keeping his hen on your farm and take the rest of the profit.
A foreign firm producing cars in India takes away profit in the form of dividend. So, the income of foreign nationals or companies is excluded while calculating GNP. Similarly, any income earned by Indian nationals or companies abroad is included as part of India’s GNP.
Adding the income of your nationals from abroad and subtracting the income of foreign nationals in your country gives you what is known as net income from abroad. You can calculate the value of GNP by subtracting or adding the net income from abroad to the value of GDP. So GNP, in a nutshell, represents the income earned by the nationals of a country.
Johnny: What factors determine the size of GNP?
Jinny: This must have been self-evident to you by now. If the net income from abroad is positive, then the value of GNP would be greater than the value of GDP. This can happen when the profits earned by nationals of your country from abroad are higher than the profits earned by foreign nationals in your country. In the opposite scenario, the value of GDP would be greater than the value of GNP. The value of a car produced by a US firm in India is treated as part of our GDP but the profit earned is treated as part of GNP of the US. Similarly, the value of goods produced by an Indian firm in the US is treated as part of the US’ GDP but the profit earned is treated as part of India’s GNP.
In the unlikely case of net income from abroad being zero, the value of GDP and GNP would be the same. The world economy works on the principle of give and take but you can still find banana economies that do not allow their neighbours’ hens to lay eggs on their soil.
Johnny: One last question. What is the difference between net national product and gross national product?
Jinny: Net national product, or NNP, is calculated by making adjustments for depreciation. As I told you, we can calculate GNP by subtracting the value of net income from abroad from the value of GDP. We can calculate the value of NNP by subtracting the value of depreciation of plant and machinery from the value of GNP.
But why should we have to worry about depreciation? Well, depreciation represents the reduction in value of plant and machinery with the passage of time. Every good that we produce today reduces the power of our machines to produce the same quantity of goods tomorrow. After 20 years, the plant and machinery may become totally obsolete. Depreciation represents the cost you will incur in replacing the old machine with a new one. So, NNP represents the income left in your hands after you have taken care of future needs.
Johnny: Thanks, Jinny. I now understand that in a borderless world, it hardly matters where your hen lays eggs.
What: Gross national product, or GNP, represents the value of all goods and services produced by factors of production owned by the nationals of a country
How: GNP can be calculated by adding or subtracting the value of net factor income from abroad from the value of gross domestic product, or GDP.
When:In the case of net income from abroad being zero, the value of GDP and GNP would be the same.
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Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at email@example.com