Question

Dr. Aravind is appointed an economics’ professor in a reputed university. In his first lecture, students asked him to elaborate on the Gross Domestic Product (GDP) and Gross National Product(GNP). Help Dr.Aravind to prepare his first lecture on the given topic with relevant examples and highlight the differences between the two concepts.

800 Words Answer in word format

Answer 1

News and reports commonly use GDP and GNP. For instance, the US GDP in the first quarter of 2020 went into a negative of 5% and in the second quarter went to a negative of 31%. Canadas GDP shrank by 38.7% in the second quarter of 2020. Swedens second-quarter fall in GDP was the worst in modern history . What does this mean for an economy and why is GDP given so much importance by policymakers and not GNP?

Both are used as measures of the economy as both measures the final goods and services. The major difference is the geographical boundaries as GDP limits it within the country whereas GNP includes activities performed by its nationals abroad or overseas. GDP or gross domestic product refers to the final goods or services produced within a country during a specific period whereas GNP or gross national product is the value of all final goods and services owned by the residents of the country. This implies that the former includes all goods and services produced within the domestic boundary by both citizens and non-citizens whereas the latter measures only the goods and services produced by the citizen domestically and abroad.

GDP = C+I+G+NX (CONSUMPTION +INVESTMENT+ GOVT EXP+ NET EXPORTS)

Consumption-residents spending money in shops or purchases of goods and services such as haircuts.

Investment - spending on houses, equipment, and capital

Govt Expenditure - govt spending on federal, state, and local goods and services

Net exports -export-import

A country's real GDP is adjusted for inflation whereas the nominal GDP is not adjusted therefore for comparison one uses Real GDP to give a more realistic view of the economy. GDP being positive or increasing is a sign of a healthy and growing economy whereas the economy falling or being negative as the situation currently shows the economy suffering. If we take the example of the US the growth in the first quarter of 2020 went into a negative of 5% and around 33 million had filed for unemployment benefits. The second quarter was, even more, devastating with 50 million filings for unemployment benefits and GDP falling to a -31%. With an increase in unemployment and pay cuts in major sectors the demand and purchasing power have fallen drastically affecting the production sector directly and also the consumption(C), investment(I), and net export(NX) aspect of the GDP. The negative and falling GDP implies slow growth and high unemployment as was the case even in 1980 or even 2008.

GNP= GDP+Factor payments from abroad - factor payments to abroad

GNP gives more emphasis on citizenship and not on output by foreign residents. For instance, an Indian investor who sends his dividend generated from the holdings back to India will be excluded whereas a US-based company or airline operation earns income from operations abroad positively contributes to GNP of the US. Although both were used as measures currently GDP is the universal measure as GNP was abandoned by the US in 1991 due to the fact that GDP is closely linked to the other economic data like unemployment and production and also for the ease of comparison. Although GDP is used as the measure the difference between GDP and GNP indicates the reliance on international trade or financial operations such as FDI.

Today GDP as a measure is highly criticized for not being a good measure of economic well-being. GDP does not take into consideration environmental sustainability which should be given utmost importance and doesn't adjust for leisure time or distribution of goods. The unpaid work of women and the black market like drug sales, gambling, or prostitution is also omitted. The transactions and income from such activities are not reported hence giving less accurate estimates of the GDP. This GDP measured is used for structuring government policies and comparisons but if the result is less accurate it can negatively affect the economy and its growth, therefore, questioning the measure itself as an economic indicator.