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Gross Domestic Product (GDP) and Gross National Product (GNP) are macroeconomic terms that refer to the value of goods. The difference between GDP and GNP is that while GDP is more focused on the value of goods produced within the territorial borders of a country, GNP is concerned with the total value of goods produced by the citizens of a country, irrespective of the location. Another difference between GDP and GNP is that GDP considers the output of all the people in the country, regardless of whether they are nationals of that country, while GNP only considers the output of its nationals. Also, the GDP is the main or primary macroeconomic factor used by majority of world governments to assess the state of their economies.
The reason why the GDP is the preferred index for monitoring the health of a country’s economy is due to the fact that it takes into consideration other important macroeconomic factors like the rate of national production and the effect of demand and supply on the value of those goods. GNP is more external and may be used for purposes that include the assessment of the income of the citizens in a country for tax purposes and other considerations. GDP may also serve as an indicator of impending inflation, deflation, recession or economic boom. An example of the difference between GDP and GNP is a citizen or resident of the United States who has investments in Britain, Ghana, Dubai and Tokyo. The proceeds from these investments will be included in the GNP calculations, but the GDP calculations will be more focused on those investments within the United States.
GDP and GNP are different because GDP tracks the goods that are produced within a country from pre-production to production in order to assign a value to it. For instance, GDP measures the demand for finished goods within a cycle, discounting the raw materials that were used in producing the finished good. An example of this is a chocolate bar, which is a finished product. The GDP will only assess the value of the chocolate bar and not the cocoa, sugar or other ingredients used in making it since this will be counting those raw materials twice. Values of raw materials are only assessed at their face value if the raw materials were not used to produce anything at the end of that GDP cycle.
Because it focuses on the goods produced within a specific country, gross domestic product is a better indicator of the health of a country's economy than gross national product.
Decisions on money lending and investment risk are based on a company's actual performance, not on the output of the individuals within that company.
In short, if a company's products are selling, investors are happy and the economy is happy.
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