Gross National Product and Gross National Income

This paper will take an in-depth look at two major indicators of the health of a given economy. On the production side, this essay will review the concept of a country's gross national product. On the consumer side, the paper will shed light on gross national income. By analyzing the nature of these two economic indicators, the reader will glean a better understanding of the balance between productivity and consumer confidence in the postindustrial era.

Keywords Gross Domestic Product (GDP); Gross National Income (GNI); Globalization; Gross National Product (GNP); Less Developed Country (LDC); Non-Governmental Organization (NGO); Value Added

Gross National Product & Gross National Income

Overview

In his iconic work The Wealth of Nations, Adam Smith summarized the balance between the consumer and the producer as a core of a strong, healthy economy. "Consumption is the sole end and purpose of all production," he said, "and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer" (Adam Smith Institute, 2003).

Indeed, production is central to the health of a nation's economic landscape. Then again, as Smith correctly points out, production must occur within the framework of the overall economy—that is, it must attend to the demand of the consumer, lest an imbalance occur. It is for this reason that the main indicators of a nation's economic condition focus on the balance between production and consumer demand.

At the same time, production is linked to the needs of the consumer, as well as a host of other important factors. In an ever-evolving international economic environment, it is invaluable to determine both whether a national economy is healthy and how it compares to others within the international community.

This paper will take an in-depth look at two major indicators of the health of a given economy. On the production side, this essay will review the concept of a country's gross national product. It will also briefly outline some other models employed to gauge economic health, such as gross domestic product. By analyzing the nature of these economic indicators, the reader will glean a better understanding of the balance between productivity, consumer confidence and the changing global economy in the postindustrial era.

Gross National Product

Put simply, gross national product (GNP) is a measure of the total economic output of a national economy. It is derived from that sum of the value of the final goods and services produced each year by the residents of a country, regardless of whether those individuals are living in the United States or abroad.

In essence, GNP is a measure of a country's performance in terms of economic activity. Economists have developed three approaches to studying GNP, assessing income generated and spent by consumers and revenue and expenditures generated by producers. The first of these, the "income approach," studies income derived from wages, interest, rentals, and profits (such as dividends or retained wages).

The second focuses on expenditures by private consumers, firms, and the federal government and by agencies that buy goods and services. Of course, not all expenditures, particularly those by industrialized nations contributing to a global economy, stay within a domestic economy. Rather, some expenditures are for products that are imported, and some are spent on products that are exported. The expenditure approach to compiling GNP data therefore encompasses each of these areas, including money sent abroad for imports ("National Income," 2008).

The third approach looks at the value added to goods and services at varying stages of their production. This "value-added" approach is one of the more complicated aspects of aggregating GNP data, as it does not entail the cost of materials, parts, or brought-in services. Given this fact, many nations apply a value-added tax (VAT) to compensate for losses in revenue that might place labor groups at risk (Keuschnigg, 2007).

While the growth of a GNP may be assessed using these methodologies, such growth does not easily lend to predicting future growth. Indeed, the sheer complexity of a nation's GNP may be the mitigating factor, as the wide range of contributors to a GNP makes it difficult to predict future growth as an aggregate. One study, for example, assessed the predictability of future growth of a given GNP based on governmental announcements regarding such growth. The study concluded that such announcements, while reflective of current growth, did little to foment elements that could be used for predicting future growth (Rodriguez & Schulstad, 2007).

There are a number of benefits to using GNP as a determinant of a national economy's health:

• GNP analysis reviews a product's value at the end of its production, thereby simplifying the intricacies of product development.

• GNP-oriented analysis includes income generated from exports and imports, thereby creating a broad scope of a national economy as it pertains to the global environment.

There are, of course, limits to using GNP as the measuring stick for economic performance. While the GNP assesses a final product's value, it does not account for improvements to the quality of a product. Such a shortcoming does not allow for a full assessment of product development and its future performance in the marketplace.

Although GNP accounts for market-based outputs in the determination of productivity, it does not include nonmarket outputs, such as volunteer service. For example, disaster recovery efforts like that which occurred after Hurricane Katrina required the work of thousands of public safety, health care, military, and volunteer personnel, but none of what was performed during this recovery effort contributed to the economy. Indeed, although its ultimate impact was helping New Orleans reinvigorate itself, the work that was done was not technically quantifiable in terms of the nation's economic condition (Cloutier, 2008).

In an interesting study of less-developed countries (LDCs), the authors offered that that production along the lines of that which is gauged by either gross domestic product (GDP) or GNP is the more applicable approach to studying an individual country's performance. Income, the analysis concluded, is less of an explanatory measure of the output of certain LDCs, while production output, such as those seen from export, appears to be the more relevant aggregation of data on an LDC's economic condition. Indeed, many LDCs are hampered significantly by an inability to even tax income and, as a result, must find alternative tax revenues (Truong & Gash, 1979).

Indeed, there is a wide range of complexities to analyzing all aspects of production as the primary determinant of the state of health of a given national economy. While the increasingly global marketplace necessitates a level playing field of data and assessing the GNP may prove to be that leveling mechanism, there are other important factors to consider.

The World Bank

Since 1993, the World Bank, in its pursuit of ranking nations in terms of economic health, has been following the lead of the United Nations System of National Accounts (SNA) and employing a system of analysis of the status of a national economy that measures total domestic and nonresident income. However, a critical element of the World Bank's methodology was that it was a departure of sorts from GNP. The GNP, after all, measures the total domestic and foreign value added income. Such measurements have allowed the World Bank to assess the most productive of economies and compare them with other nations.

Then again, there is an element to the World Bank's analytical framework that is different from the GNP and GDP systems. Every state in the world employs protectionist methods designed to retain some revenues on imports. These taxes have two purposes: the first is to ensure that domestic businesses are not given an unfair disadvantage by importers, and the second is to generate much-needed revenues for national coffers. Conversely, however, as these taxes represent a blow to income for the importer itself, they can comprise a sizable expense that may help draw an inconsistent picture of the true state of health of a given economy.

Under the gross national income (GNI) framework, however, many of these inconsistencies are avoided by taking into consideration such tax expenditures. Whereas GDP looks primarily at the dollar value of all finished goods and services produced in a given year, GNI takes its perspective from the other side of the equation: GNI, which is an updated version of gross national product, “is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad” (finfacts.com, 2005). GNI studies the total dollar value of money earned from producing such goods and services, including profits, less expenditures on taxes. In this capacity, GNI and GNP are interchangeable. Still, taxation seems to be the only significant difference between the two concepts; many see GNI as the next evolutionary term affixed to this arena but do not see the same for GDP.

An excellent example of the differences between GNI and GDP can be found in the country case of Ireland. In the 1990s, Ireland began a steady climb up the list of the rankings of wealth per capita per its GDP. However, a number of mitigating circumstances affected Ireland, due in large part to a growing number of multinational corporations in which individuals generate revenues simply by working abroad. While under the GDP measure, based on this information, GDP did not account for this multinational element, while GNP did. In fact, under the GDP, the rank Ireland held by 2003 was number four. When the inward investment of that country was studied, however, these rankings changed (a factor that was not accounted for in GDP)—Ireland would have been ranked at about seventeen (OECD Observer, 2005).

To better understand the different applications of GNP/GNI and GDP, it is useful to create a profile of GDP and how it is relevant to the study of a nation's economic health. It is to this topic that this paper will next turn attention.

Gross Domestic Product

In 1991, the United States Bureau of Economic Analysis (BEA) stopped using GNP as the key measure of economic activity in the U.S., preferring instead to employ the formula of the GDP. It did so to correspond with the United Nations System of National Accounts (SNA), which had made the move earlier. The main reason for this switch was the fact that GNP accounts for income generated by residents regardless whether they reside in the nation in question. Additionally, production studied under the GNP is irrespective of locale—that is, income is accountable whether it comes from operations overseas or inside the country's borders (cftech.com, 2004).

Meanwhile, GDP is the total value of production realized by resident producers within the geographic borders. People from other nations may come within those borders and work, their labor accounted for in the GDP. Embassies and the United Nations, for example, would all appear as contributors to a nation's GDP. As one study from the Philippines concluded, "GDP is the value of goods and services made in the Philippines while GNP is the value of goods and service made by Filipinos” (Philippine Institute for Development Studies, 2006).

Whereas GNP and GNI incorporate a number of extraterritorial factors within their frameworks, GDP appears as the crossing point of three sides of the economy:

• Income, which arises from payments for production and is also central to demand.

• Demand, the force that necessitates production and/or services rendered.

• Production, based on the demand of the consumer (Piana, 2001).

This circular flow rests at the core of the GDP, each element of which has an influence on the others.

Put simply, GDP is another mode of studying the health of a given economy. This fact is a departure from the definition of GNP and GNI, in which the fiscal health of an economy's individual contributors is ascertained. As this paper will next demonstrate, there are useful applications for both GNP/GNI and GDP.

Applications

The Global Marketplace

Since the end of World War II, one of the most pivotal issues facing the international community has been helping LDCs experience the same degree of prosperity that industrialized nations enjoy. International development programs are offered by nearly every wealthy nation as well as most international government organizations, such as the World Bank, the United Nations, and regional trade organizations.

Central to creating effective international development programs is the ability to gauge how LDCs are responding to such initiatives. Development institutions and agencies look to a number of indicators to follow local growth in production and economic stabilization. After the Persian Gulf conflict of the early 1990s, for example, redevelopment of Kuwait was gauged in terms of a return to oil production, a pivotal element of that country's economic engine. Once the oil industry was back on its feet, Kuwait saw an explosion in GDP that continued until the late 2000s, when it leveled off. At $57,102, Kuwait's per capita GDP in 2011 was far behind such small, wealthy countries as Luxembourg ($115,377) and ahead of the United States, at $47,882 (United Nations, 2013).

Then again, GDP does not account for all aspects of economic development. Oil-rich Kuwait's 2011 per capita GNI, taking into account exchange rates with the US dollar, was about $61,039, as compared to $48,585 for the United States and $82,045 for Luxembourg (United Nations, 2013). Such discrepancies suggest that there are other elements at work in the economic development of a given country besides domestic production.

Such confusion in rankings lends to the notion that GDP may be too focused on productivity, whereas GNI creates a broader picture not only of a nation's productivity but also of the ability of citizens to capitalize on such prosperity. Despite a skyrocketing GDP, for example, Kuwait is not considered by some to yet be a "developed nation" (Hosseini, 2003). Indeed, there are more factors at work in the establishment of an economically healthy country than GDP incorporates, at least in terms of international development and parity among nations. Such a trend suggests that the parameters covered by a GNP/GNI framework may be optimal in this pursuit.

In the postindustrial era, there is an ongoing trend of commerce moving well beyond borders, as business is being conducted (and revenues being generated) in markets in which national government regulation over such business is minimized. In essence, while the nation-state and its economic infrastructure remains intact in the modern international community, the commerce arena is moving toward globalization (a trend that entails the generation of a nonterritorial economic system). Although bilateral and multilateral trade relationships continue to be forged, many businesses and subnational groups are increasingly participating in nongovernmental organizations (NGOs) to create international networks.

It is becoming clearer that more and more political systems and subnational groups are becoming involved in the global economy. GNI is playing an increasingly important role in this trend. One study of 130 countries over a 20-year period supports the idea that such participation is hinged on the potential economic returns that can occur from NGO membership. In fact, improvements to a system's GNI are seen in this study as a major factor in drawing together NGO members (Lee, 2007). Indeed, globalization is creating a vast network of international and subnational lines of communication that is only enhanced by the introduction of new communications technologies and systems. In the process, national economies are becoming more and more intertwined and interdependent. Because of this international commerce boom, data pertaining to imports and exports is essential to understanding a national economy's position in the global economy. GNI's framework, therefore, appears to be more relevant than ever.

Conclusions

The economist Charles Caleb Cotton once said that commerce "flourishes by circumstances, precarious, transitory, contingent, almost as the winds and waves that bring it to our shores" (Khalid, 2008). Indeed, business, and the system of economics that governs it, is an intricate tapestry of resources, regulations, networks, and interests. Economies are fragile systems, capable of bringing great prosperity to a nation if all of their mechanisms are well-operated and equally capable of devastating a political system if negative elements are allowed into the equation.

It is for this reason that economists seek to gain an understanding of the trends and forces that contribute to the fiscal health of national economies. They look to the factors that encourage or inhibit economic growth, and they look to compare the overall systems with those of other nations

As this paper has demonstrated, there are two general approaches to assessing the overall health of an economy. This essay has focused in particular on one of these gauges, gross national product (GNP) and its evolutionary successor, gross national income (GNI). These two areas identify the elements that comprise the production output of a given economic system. GNP and GNI are arguably the most comprehensive of the economic indicators, as they not only assess the domestic production of a national economy, but take into account the external, foreign-based influences that international commerce creates for a domestic economy as well.

There are circumstances in which these external elements (as well as the taxes that serve as contributors to expenditures) are considered superfluous to understanding the purely domestic side of economic health. Gross domestic product has become the primary tool in this arena, giving a simple profile of the status of the relationship between income, consumer demand, and production.

Then again, there are conditions that are continuing to evolve governing the way commerce (and hence economic development) is conducted in the international community. The technological advancements, improved forms of communication, and increased networking capabilities offered in the twenty-first century are creating a global economy instead of a collective of national economies. It remains critical to keep in mind the extraterritorial contributions to the domestic economy, a trait that is intrinsic in a country's GNP/GNI.

The GNP (and its successor, GNI) remains a relevant formula in the determination of the fiscal health of an economic system. As the global marketplace continues to evolve, GNP and GNI will undoubtedly continue to remain an important part of it.

Terms & Concepts

Gross Domestic Product (GDP): The total value of production realized by resident producers within the geographic borders.

Gross National Income (GNI): Updated term for GNP, accounting for taxation on international commerce.

Globalization: Trend in which national economic institutions are being eschewed in favor of an international economic system.

Gross National Product (GNP): The total economic output of a national economy.

Value Added: Monetary worth attached to various stages of development of a product or service.

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Wu, F., et al. (2003). Outward foreign direct investment and its impact on the home economy. Journal of Asian Business, 19, 27–48.