Gross National Product (GNP) – UPSC Notes – Economy
Gross National Product (GNP) embodies the aggregate economic output generated by a nation’s citizens, irrespective of their geographical whereabouts, during a defined period. GNP encompasses the participation of both native and foreign inhabitants in a nation’s economic endeavors. This concept of Gross National Product (GNP) holds significance in the UPSC/IAS 2023 Economy curriculum, and is elaborated upon in this article.
Gross National Product
- GNP encompasses the economic contributions of a nation’s residents both domestically and internationally.
- It incorporates income acquired by residents from investments, employment, and business operations within the nation, as well as earnings derived from activities conducted overseas.
- Likewise, GNP takes into account the income earned by foreign residents involved in economic activities within the nation’s borders.
- Mathematically, GNP can be expressed as the aggregate of Gross Domestic Product (GDP) and net income earned from abroad.
Gross National Product (GNP) = GDP + Net Income from Abroad
- Net income from abroad signifies the disparity between receipts obtained from foreign nations and outlays disbursed to foreign entities.
- For example, when a nation garners more income from its citizens laboring overseas or from investments in foreign territories than it disburses to foreign residents within its confines, it registers a positive net income from abroad.
- GNP does not encompass earnings accrued by foreign nationals within the nation or any commodities fabricated by foreign enterprises in the nation’s manufacturing facilities.
Calculation of Gross National Product (GNP)
Only the final goods and services are considered in calculating GNP to prevent double counting of intermediate products.
When computing a country’s GNP, the following components are factored in:
- Consumption Expenditure
- Investment
- Government Expenditure
- Net Exports (Total exports minus total imports)
- Net Income (Income earned by residents in foreign countries minus income earned by foreigners in the country)
The mathematical formula for GNP calculation is as follows:
GNP = Consumption expenditure + Investment + Government expenditure + Net exports + Net income
The manufacturing of goods such as equipment, machinery, agricultural products, and vehicles, along with certain services like consulting, education, and healthcare, are all encompassed within GNP.
The cost of rendering services is not individually assessed as it’s integrated into the final product price.
Calculating GNP per capita facilitates cross-country comparisons, but it becomes complex in cases of dual citizenship, as individuals’ earnings are tallied as part of GNP in each respective country, leading to double counting.
Importance of GNP
- Comprehensive Economic Assessment: GNP extends beyond measuring domestic economic activity by integrating both domestic and international earnings of a country’s residents, offering a holistic view of economic engagement globally.
- Trade Relations and Net Income: GNP reflects a nation’s trade dynamics and net income garnered from abroad. A positive net income indicates that a country’s residents earn more from foreign activities than foreigners do within its borders.
- Income Distribution: GNP sheds light on income distribution among residents, enabling policymakers to evaluate and tackle disparities. It helps discern whether income from international activities benefits a broad swath of the populace.
- Economic Growth Comparison: GNP enables meaningful comparisons of economic growth among countries, considering residents’ external engagement. This facilitates cross-border analysis and benchmarking.
- External Economic Engagements: GNP serves as a crucial tool for comprehending a nation’s global economic interactions. It assists policymakers in making informed decisions regarding trade agreements, foreign investments, and economic diplomacy.
- Incorporation into Policy: GNP data supports the formulation of effective economic policies, trade strategies, and development plans. It guides decisions aimed at maximizing income, economic growth, and overall prosperity.
Drawbacks
- Data Collection and Accuracy: Accurate GNP calculation hinges on comprehensive data collection from both domestic and international sources. Challenges in obtaining precise data on net income from abroad can lead to potential measurement errors.
- Currency Fluctuations: International transactions involve currency exchange rates, which are subject to fluctuations over time. These fluctuations can influence the calculation of net income derived from foreign activities.
- Globalization Complexity: In an increasingly globalized world, monitoring residents’ economic engagements abroad becomes more intricate. Complex financial instruments and multinational corporations further complicate data collection.
- Informal Sector Challenges: In economies with a significant informal sector, accurate data collection becomes more challenging as informal economic activities are often not fully captured in official statistics.
- Income Repatriation: Tracking the repatriation of income earned abroad can be difficult. Some earnings may not be repatriate immediately, leading to underestimation or overestimation of net income from abroad.
- Changing Economic Structure: As economies evolve, the structure of income generation can change rapidly due to new industries, technologies, and business models, impacting the accuracy of GNP calculations.
- External Debt and Investment: International financial flows, including debt servicing and foreign investments, can influence net income earned from abroad, posing challenges to accurate calculations.
GNP Vs. GDP
| Aspect | Gross Domestic Product (GDP) | Gross National Product (GNP) |
|---|---|---|
| Definition | Total economic output produced within a country’s borders, regardless of ownership. | Total economic output produced by a country’s residents, both domestically and abroad. |
| Scope | Focuses solely on economic activities within a country’s geographical boundaries. | Includes economic activities of a country’s residents, whether located within the country or abroad. |
| Inclusion of Income | Includes income earned by all individuals and entities operating within the country’s borders. | Includes income earned by a country’s residents from both domestic and foreign sources. |
| Exclusion of Income | Excludes income earned by foreign residents within the country’s borders. | Excludes income earned by a country’s residents from activities located outside its borders. |
| Formula | GDP = Consumption + Investment + Government Spending + (Exports – Imports) | GNP = GDP + Net Income from Abroad |
| Net Income from Abroad | Not factored into GDP calculation. | The difference between income earned by residents from abroad and income earned by foreign residents within the country is added to GNP. |
| Trade Balance | Trade balance (Exports – Imports) is included in GDP. | Trade balance is not part of GNP; it’s accounted for separately in the form of net income from abroad. |
| Calculation Focus | Focuses on the economic activity within a country’s geographical borders. | Focuses on the economic activity of a country’s residents, regardless of where they operate. |
| Global Perspective | Provides insights into a country’s internal economic performance. | Offers a more comprehensive view of a country’s economic engagement on a global scale. |
| International Comparisons | Useful for comparing economic growth and performance among different countries. | Useful for comparing the economic engagement and impact of a country’s residents both domestically and internationally. |
Conclusion
Gross National Product (GNP) serves as a multifaceted economic measure that extends beyond mere assessment of economic output. It encompasses income distribution, trade dynamics, and a nation’s external economic engagements.
India’s approach to integrating GNP into its economic analysis underscores the nation’s dedication to comprehensive economic assessment.
As economies aim for sustainable growth and inclusive development, GNP retains its critical importance in evaluating progress and shaping policies.
FAQs on Gross National Product
Question: What is GNP?
Answer: GNP, or Gross National Product, refers to the total value of all goods and services produced by a country’s residents, both domestically and abroad, within a specific time period.
Question: What are the parameters to calculate GNP?
Answer: The parameters used to calculate GNP include consumption expenditure, investment, government expenditure, net exports, and net income from abroad.
Question: What is the Mathematical formula of GNP?
Answer: The mathematical formula for GNP is GNP = GDP + Net Income from Abroad.
Question: What are the drawbacks of GNP while calculation?
Answer: Drawbacks of GNP calculation include challenges in accurately measuring net income from abroad, complexities in accounting for informal economic activities, and changes in economic structures impacting accuracy.
Question: What is the difference between GNP and GDP?
Answer: GNP measures the total economic output produced by a country’s residents, domestically and abroad, while GDP measures the total economic output produced within a country’s borders, regardless of ownership.
Question: Which is greater, GDP or GNP?
Answer: Typically, GDP is greater than GNP for countries that have significant foreign investments or earnings from abroad.
Question: What is the GNP of India today?
Answer: The GNP of India today can vary and would require current economic data to provide an accurate answer.
Question: Which country has the highest GNP?
Answer: The country with the highest GNP can vary depending on the latest economic data. As of [current date], the United States has traditionally held one of the highest GNP figures globally.
Question: Which country has the lowest GDP?
Answer: The country with the lowest GDP can also vary over time. As of [current date], it would require up-to-date economic data to determine which country has the lowest GDP.
UPSC PYQ Mains
- Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (UPSC 2020)
- Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC 2019)
- “Industrial growth rate has lagged behind in the overall growth of Gross Domestic Product(GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (UPSC 2017)
- What are the hurdles faced by the Finance Ministers of India in keeping the fiscal deficit below 3 − 4 percent of the GDP? Suggest steps to lower the fiscal deficit. (UPSC 2001)
UPSC PYQ Prelims
Question: Consider the following statements (UPSC 2018)
1) The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2) The Central Government has domestic liabilities of 21% of GDP as compared to that of war of GDP of the State 2 Governments.
3) As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (c)
Question: A decrease in the tax-to-GDP ratio of a country indicates which of the following? (UPSC 2015)
1) Slowing economic growth rate
2) Less equitable distribution of national income
Select the correct answer using the code given below.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a)
Question: Increases in absolute and per capita real GNP may not necessarily indicate greater economic development, if
- (a) Gross National Product is high.
- (b) Agriculture’s output does not keep up with the industry.
- (c) Poverty and unemployment are both on the rise.
- (d) Imports are increasing at a higher rate than exports.
Answer: (c)
Question: In India, inflation is measured by the: (UPSC 1997)
- (a) Wholesale Price Index number
- (b) GDP Deflator
- (c) Consumers Price Index for agricultural workers
- (d) National Income Deflation
Answer: (a)
Question: In the context of the Indian economy, consider the following statements: (UPSC 2011)
- The growth rate of GDP has steadily increased in the last five years.
- The growth rate in per capita income has steadily increased in the last five years.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (b)
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