Gross Domestic Product (GDP) vs Gross National Product (GNP)

One question separates them: where, or who?

GDP asks where the output was produced, and GNP asks whose factors produced it. If a factory sits inside a country's borders, the value it adds counts in that country's GDP no matter who owns it. If a firm or worker is a resident of that country, what they earn counts in that country's GNP no matter which side of a border they are standing on. Two cases make the split concrete. A car plant in the United States owned by a German company adds its value added to United States GDP, while the profit flowing to its German owners counts in Germany's GNP. Run the same test on asset income: dividends a United States resident collects on shares in a Japanese firm sit inside Japan's GDP and inside United States GNP at the same time. Nothing is double counted, because the two measures simply draw the boundary in different places. One precision point: the national accounts define the boundary by residence, not citizenship, so someone who moves abroad long enough to establish their economic interest there counts in the national total of the country they now live in. You can practice the expenditure calculation itself at /calculate/gdp.

Net factor income from abroad is not net exports

The bridge between the two measures is net factor income from abroad, the income residents earn from labor and assets overseas minus the income foreigners earn from labor and assets inside the country. Add it to GDP and you get GNP; subtract it from GNP and you get GDP. Students routinely mistake this for net exports, the exports minus imports term inside the expenditure approach to GDP, but the two track completely different flows. Net exports covers goods and services crossing the border. Net factor income covers payments to factors of production: wages, profit, rent and interest. A country can run a large trade surplus and still have net factor income near zero, so the two adjustments are independent of each other. One more trap sits in the word gross, which means before depreciation in both measures, so subtracting depreciation from GDP gives net domestic product and subtracting it from GNP gives net national product, rather than converting either measure into the other.

Which measure answers which question

Neither measure is more correct, and which one is larger depends on the country. A country that hosts a lot of foreign-owned production while few of its residents earn income abroad will report GDP above GNP, because part of the output produced inside its borders belongs to foreigners. A country whose residents own substantial assets overseas or work abroad in large numbers will report GNP above GDP. GDP is the better gauge of activity, employment and the business cycle inside the borders, which is why real GDP is the output variable on the AD-AS diagram and in the growth calculation at /calculate/economic-growth-rate. GNP, and its modern income-side counterpart GNI, is the better gauge of how much income actually reaches a nation's residents, which is why international organizations classify countries by income using GNI per person.

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