What is the Difference Between GDP and GNP?

Let's take a look at the difference between GDP and GNP. For those of you who have purchased the Macroeconomics Course, this may be familiar to you.

Let’s dive into two terms that often get used interchangeably but are fundamentally different: Gross Domestic Product (GDP) and Gross National Product (GNP).

Understanding these concepts boils down to focusing on the "D" in GDP and the "N" in GNP. Once you’ve got that distinction, everything else becomes much clearer.

Gross Domestic Product (GDP)

The "D" in GDP stands for domestic, which means within a geographic location.

GDP measures all the economic activity taking place within the physical borders of a country, regardless of who owns the businesses or assets. For instance, if Nike—a U.S.-based company—operates a factory in China, the economic output of that factory counts towards China’s GDP, not the United States’.

Why? Because the activity is happening domestically in China.

Think of GDP as being tied to a map. Wherever the economic activity happens physically, that’s where it’s counted for GDP purposes. Whether it’s a local business or a foreign company, all the production within a country’s borders contributes to its GDP.

Gross National Product (GNP)

Now let’s switch to GNP, where the "N" stands for national. GNP measures the total income earned by a country’s citizens and businesses, regardless of where in the world that income is generated.

So, using the Nike example again, all the profits from Nike’s operations in China, Chile, or Tanzania would count towards the United States’ GNP because Nike is an American company.

If you want to think of GNP, imagine every company or business carrying a little flag of their home country, no matter where they’re operating. All the economic activity associated with that flag contributes to the GNP of the country it represents.

Real-Life Example: A Mall in Santiago

To make this distinction clearer, let’s imagine a mall in Santiago, Chile. Inside the mall, there are stores from:

  • Adidas (a German company),
  • Patagonia (a U.S. company),
  • Columbia Sportswear (another U.S. company), and
  • White (a Chilean company).


For Chile’s GDP, you would count the economic activity of all the stores, regardless of where the companies originate.

However, for Chile’s GNP, only the economic activity of the Chilean company, White, and its operations—both domestically and abroad—would count. The profits from Adidas, Patagonia, or Columbia Sportswear would count toward the GNP of their respective home countries, not Chile’s.

Why This Matters

The difference between GDP and GNP becomes crucial when analyzing an economy’s structure and performance.

GDP shows the economic activity within a country’s borders, giving a sense of its internal economic health. GNP, on the other hand, reflects the global reach of a country’s businesses and citizens, emphasizing their economic influence worldwide.

For countries with significant overseas investments or multinational corporations, GNP often exceeds GDP.

Conversely, for countries hosting substantial foreign investments, GDP might be higher than GNP.

 

In summary, GDP is all about where the activity happens, while GNP is about who owns the activity.

Keep this distinction in mind, and you’ll never confuse these two terms again.

So next time you are at the mall, take a look all of the stores.

You’ll never see them the same.