Economy 101: measuring a country’s economy

GDP, GNP, GNI

Many times, like when we read reports on pharmaceutical markets or study the market conditions of a region, we find references to the size of national and regional economies expressed as GDP, GNP or GNI. But, beyond guessing that the bigger the number the richer the economy, do we understand what these values really mean? Here, a brief and clear explanation of the definitions and differences.

First, the definitions of GDP and GNP from the World Bank site, and of GNI from Wikipedia:

GDP: Gross Domestic Product. The value of all final goods and services produced in a country in one year. GDP can be measured by adding up all of an economy’s incomes- wages, interest, profits, and rents- or expenditures -consumption, investment, government purchases, and net exports (exports minus imports). Both results should be the same because one person’s expenditure is always another person’s income, so the sum of all incomes must equal the sum of all expenditures.

GNP: Gross National Product. The value of all final goods and services produced in a country in one year (GDP) plus income that residents have received from abroad, minus income claimed by nonresidents. GNP may be much less than GDP if much of the income from a country’s production flows to foreign persons or firms. But if the people or firms of a country hold large amounts of the stocks and bonds of firms or governments of other countries, and receive income from them, GNP may be greater than GDP. “Gross” indicates that the value lost through the “wear and tear” of capital used in production is not deducted from the value of total output. If it were deducted, we would have a measure called net domestic product (NDP), also known as national income. The words “product” and “income” are often used interchangeably, so GNP per capita is also called income per capita.

GNI: Gross National Income. Consists of: the personal consumption expenditure, the gross private investment, the government consumption expenditures, the net income from assets abroad, and the net exports of goods and services, after deducting the indirect business taxes. So, the GNI is similar to the GNP, except that in measuring the GNP one does not deduct the indirect business taxes. The indirect business taxes are taxes on consumption, expenditure, privilege, or right but not on income or property. Customs duties levied on imports, excise duties on production, sales tax or value added tax (VAT) at some stage in production-distribution process, are examples of indirect taxes.

To measure the relation between these values and the population of a country or region, we can simply divide them by the number of people in those economies and obtain GDP, GNP and GNI per capita. We are then calculating an average.

Although these numbers are useful to measure the size of economies, we should be careful because they don’t necessarily indicate the level of development of a country or region. A few billionaires and a larger group of millionaires on the one hand and many millions of people living in poverty on the other hand, as in India and China, may still produce a reasonable economic figure.

Something else to be considered is whether GDP, GNP and GNI are expressed in nominal terms or as PPP. The nominal terms give you the “absolute” values, in reference to the world market, whereas PPP, or Purchasing Power Parity, is a corrected number that considers the cost of goods life for people in a specific economy.

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