What is the Difference Between GDP and GNP?

When measuring how rich or powerful a country's economy is, economists use two famous acronyms: GDP and GNP. While they sound almost identical and both measure national wealth, the mathematical difference between them is incredibly important in Macroeconomics.

Question (Click to Flip)

Does money sent home by NRIs count in GDP or GNP?

Answer

Remittances (money sent back to India by an Indian software engineer working in Dubai) are completely ignored in India's GDP (because he worked outside India). However, it is fully added to India's GNP.

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Key Facts

For most developed countries like the USA, their GNP is often higher than their GDP because American multinational companies own thousands of highly profitable factories all over the world.

If a country is completely sealed off from the rest of the world (like North Korea) with zero foreign companies and zero foreign workers, its GDP and GNP will be exactly 100% equal.

1. GDP (Gross Domestic Product) - The 'Where' Factor

Definition: GDP measures the total value of all goods and services produced geographically inside the physical borders of a country in one year.
The Rule: In GDP, we only care about Where the product was made. We do not care Who made it.
Example: If an American company like Apple builds an iPhone factory in Chennai, India, the money made from those iPhones is added to India's GDP, because the factory is physically standing on Indian soil.

2. GNP (Gross National Product) - The 'Who' Factor

Definition: GNP measures the total value of all goods and services produced by the citizens of a country, no matter where they live in the world.
The Rule: In GNP, we only care about Who made the money (the passport of the company or person). We do not care Where the factory is located.
Example: An Indian software company like TCS opens a massive office in London, UK. The profit made by that London office is added to India's GNP, because TCS is an Indian-owned company, even though the office is outside Indian borders.

3. The Mathematical Formula

To calculate GNP, you start with the GDP and make an adjustment for international money:

GNP = GDP + Net Factor Income from Abroad (NFIA)

(NFIA means: The money Indian citizens earned in foreign countries MINUS the money foreign citizens earned inside India)..

Questions and Answers

Does money sent home by NRIs count in GDP or GNP?+

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