How is gnp derived from gdp

The circular flow involves two basic assumptions:. Goods and services flow in one direction and money payment flow in the opposite or return direction, causing a circular flow. Bureau of Economic Analysis. Consumption C is normally the largest GDP component in the economy, consisting of private household final consumption expenditure in the economy.

These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

Also, it is important to note that goods such as hand-knit sweaters are not counted as part of GDP if they are gifted and not sold. Only expenditure based consumption is counted. Investment I includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households not government on new houses is also included in Investment.

This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc. To count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Note that buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.

Government spending G is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. Exports X represents gross exports. Imports M represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. By calculating the value of goods and services produced in a country, GDP provides a useful metric for understanding the economic momentum between the major factors of an economy: consumers, firms, and the government.

There are a few methods used for calculating GDP, the most commonly presented are the expenditure and the income approach. Both of these methods calculate GDP by evaluating the final stage of sales expenditure or income income. The most well known approach to calculating GDP, the expenditures approach is characterized by the following formula:. The income approach adds up the factor incomes to the factors of production in the society.

It can be expressed as:. This method consists of three stages:. The sum of net value added in various economic activities is known as GDP at factor cost. GDP at producer price theoretically should be equal to GDP calculated based on the expenditure approach. However, discrepancies do arise because there are instances where the price that a consumer may pay for a good or service is not completely reflected in the amount received by the producer and the tax and subsidy adjustments mentioned above may not adequately adjust for the variation in payment and receipt.

The income approach evaluates GDP from the perspective of the final income to economic participants. After that point, it started to use GDP in its place for two main reasons.

First, because GDP corresponds more closely to other U. Secondly, the switch to GDP was to facilitate cross-country comparisons because most other countries at the time primarily used GDP. GNP and GDP are very closely related concepts, and the main differences between them come from the fact that there may be companies owned by foreign residents that produce goods in the country, and companies owned by domestic residents that produce goods for the rest of the world and revert earned income to domestic residents.

For example, there are a number of foreign companies that produce goods and services in the United States and transfer any income earned to their foreign residents. Likewise, many U. If income earned by domestic corporations outside of the United States exceeds income earned within the United States by corporations owned by foreign residents, the U. For example, in U. While GDP is the most widely followed measure of a country's economic activity, GNP is still worth looking at because large differences between GNP and GDP may indicate that a country is becoming more engaged in international trade , production, or financial operations.

The larger the difference between a country's GNP and GDP, the greater the degree of incomes and investment activity in that country involve transnational activities such as foreign direct investment one way or another.

Gross national product is the value of all products and services produced by the citizens of a country both domestically, and internationally minus income earned by foreign residents. For instance, if a country had production facilities in a neighboring country and its home country, gross national product would account for both of these production outputs.

This figure then subtracts income earned by foreign residents within the country. Consider a country that has a gross national product that exceeds its gross domestic product. This indicates that its citizens, businesses, and corporations are providing net inflows to the country through their overseas operations. Consequently, this higher gross national product may signal that a country is increasing its international financial operations, trade, or production.

Bureau of Economic Analysis. Accessed August 13, Federal Reserve Bank of St. GDP can be used to compare the performance of two or more economies, acting as a key input for making investment decisions in a country. It also helps government draft policies to drive local economic growth. When the GDP rises, it means the economy is growing. Conversely, if it drops, the economy shrinks and may be in trouble. But if the economy grows to the point where inflation builds up, a country may reach its full production capacity.

Central banks will then step in, tightening their monetary policies to slow down growth. During these periods, monetary policy is eased to stimulate growth. Longer periods of negative GDP, which indicates more spending than production, can cause big damage to the economy. It leads to jobs loses businesses closures and idle productive capacity. Gross national product is another metric used to measure a country's economic output.

Where GDP looks at the value of goods and services produced within a country's borders, GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.

It factors in citizenship but overlooks location. For that reason, it's important to note that GNP does not include the output of foreign residents. For example, a Canadian NFL player who sends his income home to Canada, or a German investor who transfers the dividend income generated from her shareholdings to Germany, will both be excluded from GNP.

On the other hand, if a U. GNP can be calculated by adding consumption, government spending, capital spending by businesses, and net exports exports minus imports and net income by domestic residents and businesses from overseas investments. This figure is then subtracted from the net income earned by foreign residents and businesses from domestic investment. A quick look at the absolute GDP and GNP numbers of a particular country over the past two years indicate they mostly move in sync.

There is a nominal difference between GDP and GNP figures of a particular country depending upon how the economic activities of the nation are spread across domestically or globally. For instance, many American businesses, entrepreneurs, service providers, and individuals who operate across the globe have helped the nation secure a positive net inflow from the overseas economic activities and assets.

This bumps up U. To explain, we can look at GNP as what the people of the nation produce not only domestically, but abroad. For example, Ford, an American company, manufactures and sells its motor vehicles throughout Europe. In , Ford sold close to 1 million motor vehicles.

This is because it is an American company, earning an income that is being diverted back to America. We can also think of GNP in terms of citizenship. Those people who are American, but operate and earn an income from abroad, are counted within GNP.

So wherever Americans are producing goods, it is included within GNP. This is because that income is generated by Indian citizens and is therefore part of the GNP figure for India. However, there is a slight difference between the two.

This is because GNP only factors in the income that is derived from its citizens. This is because it is not a product that is produced by an American company or citizen.

This is because it is produced within the border, whilst GNP refers to a product that is produced by the citizen of a nation.