Understanding Gross National Income

Gross National Income (GNI) is nothing but the summation of income earned by people and companies of a country. Gross Domestic Product (GDP) is a subset of Gross National Income (GNI). 

 

The GNI value of a nation is equal to its GDP added to the money or income the country receives from foreign sources.

 

GNP and GDP: Understanding These Metrics Better

 

We know that GDP is considered by everyone across the world to assess a nation's economic health. GDP is the summation of value generated by all products and services within a country for a specific period. 

 

Every year, every country reports its GDP value. While GDP is the widely considered KPI or Key Performance Indicator for any nation, Gross National Income measures the financial health of an economy more accurately than GDP. 

 

In fact, for some countries, Gross National Income is taken into consideration and not Gross Domestic Product. The values of these two metrics (GDP and GNP) are not completely different and they are close enough usually for any nation. 

 

Gross Domestic Product considers inside income only or the income generated within the boundaries of a country but Gross National Income, in addition to inside earnings, also takes into consideration the money earned from outside countries or sources as already mentioned above.

 

The best alternative of Gross Domestic Product is Gross National Income, according to the balance. There is a subtle difference between the final results of both metrics. While Gross Domestic Product (GDP) calculates output, Gross National Income (GNI) calculates income. 

 

So in what cases the value of Gross National Income significantly differs from Gross Domestic Product? The answer is the nature of the country's economy. 

 

For instance, countries having higher foreign investments, revenues from outside sources and foreign help would result in an increased indifference in the values of Gross National Income and Gross Domestic Product.

 

(Suggested Reading: Understanding the Economy of Switzerland)

 

 

How can GNI be used as a Metric for Comparison?

 

Data related to Gross National Income is provided by the World Bank for all countries. It applies the concept of purchasing power parity (PPP) to eliminate the complexities caused due to currency exchange rates between nations.

 

The final income numbers of all countries are converted into United States Dollar (USD) so that comparing two countries on their incomes would be easier. Every method and concept have their own advantages and disadvantages. Purchasing Power Parity (PPP) is no exception. 

 

Since, according to this concept, the final value of goods and services are converted into United States dollars (USD), companies that do not sell their products or services in the United States are underestimated by Purchasing Power Parity (PPP). 

 

For example, Domino’s Pizza is sold in American cities and towns also. So, there would not be much of an issue as it is being considered by PPP methodology in an accurate way. 

 

Suppose there is an Indian company that sells its pizza only in Indian states, the problem would arise. When the final value is converted into United States Dollar (USD), this company would not be considered and the value of Gross National Income (GNI) of the country goes for a toss.

 

(Must Read: 11 Types of Economic Theory)

 

 

What is Gross National Income (GNI) Per Capita?

 

GNI per capita is nothing but the value of Gross National Income against the population of the country.

 

For countries having different populations, GNI per capita is the close-to-right metric to be considered for comparison. It helps us understand the income of the nation with respect to its human population. However, it does not take into consideration the lifestyles, way of living and costs of living. 

 

 

How Does Differentiating GNP from Other Metrics Help?

 

What happens in developing countries like India is that native people go to other places like the United States of America, Canada, Europe, Australia etc. to earn a better living for themselves and their families. 

 

According to Investopedia, Most of them send money back home very frequently. There is a considerable amount of money that comes back to India (in this scenario). These cases impact each economic metric in one or the another way. 

 

Gross National Income (GNI) and Gross National Product (GNP) take into consideration the above case but Gross Domestic Product (GDP) would not.

 

 

How to Calculate GNI, GDP and GNP?

 

Let’s start off by calculating Gross Domestic Product (GDP):

 

The elements required to calculate GDP are as follows:

 

1. Exports - Imports (Y)

2. Spending by the Government (G)

3. Company Investments (I)

4. Individual Consumption (C)

 

Gross Domestic Product (GDP) can be calculated as shown below:

 

GDP = Y + G + I + C

 

Now, let’s calculate Gross National Income (GNI):

 

Gross National Income (GNI) considers Gross Domestic Product (GDP) along with two other income scenarios:

 

1. Money earned from native individuals and businesses who live or operate in foreign nations (A)

2. Money sent by foreigners to their families back home (B)

 

Gross National Income (GNI) = GDP + (A - B)

 

Now, let’s calculate Gross National Product (GNP):

 

Gross National Product (GNP) considers Gross Domestic Product (GDP) along with two other income scenarios:

 

1. Money earned on assets of foreign countries (P)

2. Money earned by foreigners in the country (Q)

 

If we carefully notice, the two-income scenarios used to calculate Gross National Product (GNP) are different from those used to calculate Gross National Income (GNI).

 

Gross National Product (GNP) = GDP + (P - Q)

 

Impact of Gross National Income (GNI) on a Nation’s Economy

 

Gross National Income (GNI) assesses the income of a nation every year. Unlike Gross Domestic Product (GDP), it considers the money coming from anywhere and there are no geographic boundary restrictions. 

 

Once we obtain the value for Gross National Income (GNI), we can divide it by total population to get the Gross National Income per capita for a country. In other words, average income per person can be determined using both population size and Gross National Income of a nation.

 

Like already said above in the article, Gross National Income (GNI) is far more accurate than Gross Domestic Product (GDP) in estimating total income, particularly if a country gets huge investments and income from foreign sources. 

 

On the flip side, Gross National Income (GNI) has its weaknesses. The correlation between changes in Gross National Income (GNI) and improvement in a nation's economy is not so strong. 

 

Let’s say the company you are working for has increased your salary and you thought of buying a motorcycle from a local manufacturer cum retailer. The amount you spend to buy the motorcycle is the source of income for the bike manufacturer and retailer. 

 

Not only you but there are several working professionals and students who purchase motorcycles from that manufacturer. All of them become sources of income for the manufacturer. 

 

With that huge sum of money, the manufacturer can pay wages to its employees, buy important raw materials, machinery, maintain the factory and purchase other resources. In a nutshell, the increase in your salary has also enhanced the business of the motorcycle manufacturer in this case. It has a direct impact on the economic health of the country.

 

As an extension, let’s consider that you have an elder brother who is working in a Multinational Company in the United States of America. Coincidentally, he also got a hike in his salary and purchased a motorcycle from a domestic manufacturer. 

 

In this case, the employment and economic health would not be improved because your elder brother had purchased the motorcycle from a manufacturer cum retailer based out of the United States. 

 

(Recommended reading: Factors Affecting Supply of a Product)

 

In the last, Gross National Income has its uniqueness when it comes to an economic analysis of any nation. It can be used by countries and organizations to accurately determine economic health. Keeping aside the disadvantages of Gross National Income (GNI), one can always compare the countries using his key performance indicator (KPI).