GDP is the value of all final goods and services produced within a country's borders in a given year. On the other hand, gross national product (GNP) is a measurement of the market value of all the finished goods and services produced by a country's factors of production, regardless of where the factors of production are located. GNP includes the value of products made by a country's citizens and companies at home and abroad. It excludes the value of products and services produced by foreign companies within the borders of the reporting country. GDP is currently considered the better indicator of a country's economic activity and health because it measures the production and investments taking place within a country's own borders and can more accurately reflect the impact on its own citizens.
The numerical difference between GDP and GNP will reflect the ratio of domestic producers to foreign producers within a country. If a large number of foreign companies are producing within a country's borders, GDP will be higher than GNP. If a country is a large producer of products abroad, its GNP may be higher than its GDP. The differences between GDP and GNP tend to be small for larger countries, and in most cases GNP is higher than GDP. However, the differences can be significant for smaller countries with many foreign corporations operating within their borders. For example, a small country with many multinational corporations that repatriate income from local production to investors abroad will have a higher GDP than GNP, and that gap may be relatively large. Examples of this anomaly are Ireland, Luxembourg, and developing countries in Africa.
This example demonstrates how production is attributed to GDP or GNP:A U.S. car manufacturer produces cars in Canada.
- Production is counted in Canada's GDP.
- Profits sent to shareholders in the United States are counted in the United States' GNP.
While both indicators are important to observe, especially if there are significant gaps between the two, GDP will still be a more important indicator of economic activity and health. This is because Canadian workers would most likely produce those cars and, in turn, spend their wages on other goods and services in Canada, further driving the country's domestic economy. Whereas GNP measures the overall economic strength of a country's economy, GDP is a better way of measuring the size and direction of the country's local economy.