International Comparisons

1. GDP Versus GNP

We know that GDP growth from one period to the next is an indication of a healthy macroeconomy. However, GDP and GNP can also be used to help us compare growth from one nation to another, making international comparisons.

Gross Domestic Product (GDP) and Gross National Product are two common economic measuring tools used to analyze a nation’s performance. While similar, they capture different aspects of an economy.

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Both GDP and GNP attempt to measure all economic activity of a country in a year.

Both GDP and GNP measure the final value of all goods and services in an economy, so in this respect, they are very similar. The only difference is how “in an economy” is defined.

GDP, or gross domestic product, focuses on domestic production. It is concerned with where that production occurs, or the location of the production. GDP represents everything produced within a country’s borders; it does not matter who is doing the production or who owns the capital producing it.

GNP, or gross national product, on the other hand, focuses on production by nationals. It is concerned with who is doing the production. GNP represents everything produced by a nation’s people; it does not matter where the production is occurring.

Therefore, you can see that the phrase “in an economy” depends on who is doing the production or where the production is occurring.

EXAMPLE

When Hershey’s, which is an American company, produces chocolates in factories located in Mexico, the value of these chocolates count for Mexico’s GDP because they are being produced in Mexico. However, they count for the United States’ GNP because they are being produced by an American-owned company.

Using another example, when Honda cars are manufactured in Ohio, this counts for the United States’ GDP because the production is occurring here in one of our states, but it counts for Japan’s GNP because Honda is owned by Japan.

terms to know

GDP

Gross domestic product; the sum value of goods and services produced within a country’s borders.

GNP

Gross national product; the sum value of goods and services produced by a country’s nationals, regardless of location.

1a. Significance of the Difference

Now, the difference between GDP and GNP is not significant for countries that have companies doing both domestic production and foreign production and that have other foreign nations producing domestically to offset their own nation’s production elsewhere.

Note that in the previous examples, we had production occurring outside of our country offset by another country producing here, so the difference between GDP and GNP was not significant.

However, there are countries in which there is a significant difference.

GDP will actually be less than GNP in countries that have residents doing a lot of production in other nations, like Hershey’s in Mexico, but they do not have other foreign nations producing domestically to offset that production elsewhere (like Honda producing in Ohio, domestically).

In this case, GDP may not be a good indication of the actual health or strength of an economy.

Now, the opposite situation can also occur, where GDP is greater than GNP.

This occurs in countries that have a lot of other nations producing domestically, known as foreign direct investment, but they do not have a lot of their own companies producing overseas.

In these cases, GDP may be overstated, as much of the profits are leaving the country in the form of foreign direct investment. Therefore, GDP is not a great indicator of economic strength.

The following table sums up the differences between GDP and GNPL:

2. GDP Versus GNP: International Comparisons

Despite some of these issues, GDP is still widely used today as a standard way of comparing economies internationally.

As we would expect, developed countries enjoy much greater GDP growth than developing or less-developed countries.

In developed, strong economies, we find that when there is a lot of foreign investment domestically, the domestic economy still tends to benefit, as citizens in those strong countries have the wealth and income to consume the goods and services being produced.

3. GDP and Measuring the Quality of Life

Although real GDP, as mentioned, is used to compare the quality of life, or the standard of living, between countries, is it really a perfect measure of all economic activity or how people live in a country?

No, not necessarily.

First of all, real GDP does not measure any nonmarket activities, which refers to those activities that people do for themselves, such as the following:

• Cleaning our own homes
• Caring for children
• Changing the oil in our own cars

In addition, GDP does not completely measure the quality of life or well-being of a population.

EXAMPLE

A country’s economy might be “growing” as per its GDP, but perhaps it is because everyone is working much longer hours and sacrificing their leisure time. This, then, is not necessarily measuring the quality of life. We might have more stuff, but are people really better off? It also doesn’t measure things like crime or the pollution emitted from all this production.

Finally, it is important to note that when we measure GDP per person, known as GDP per capita, we need to understand that it is an average.

So, if GDP per capita rises, we can certainly say that our standard of living has improved, but this is an average. Does this mean that everyone is better off?

It could simply mean that income disparity is growing. Perhaps all of the gains to our GDP per capita have actually been realized by the most wealthy and not by the middle class or lower classes, which is very important to keep in mind.

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The bottom line is that although it is not perfect for comparing quality of life, GDP does indicate and provide a way to compare consumption across nations.