Gross National Product

GDP draws a line on a map and counts everything produced inside it, no matter who owns the factory. GNP draws the line around the people instead: everything produced by a country's residents, wherever they happen to be.

A Japanese-owned car plant in Chennai is inside India's GDP and outside India's GNP. An Indian software company's profits earned by its subsidiary in the United States are outside India's GDP and inside India's GNP. The bridge between the two figures is net factor income from abroad.

The workbook defines both measures in one paragraph of Chapter 5. GDP is the market value of goods and services produced within a country's frontiers, irrespective of the nationality of the owner. GNP is the market value of goods and services produced by a country's residents (nationals), irrespective of where in the world they are. The difference between them is net factor income from abroad — income received by residents minus income paid to non-residents.

The same chapter gives three ways of counting national income — the product method (add up the output of agriculture, industry and services), the income method (add up wages, professional income, profits and returns to capital), and the expenditure method (private consumption plus government spending plus gross capital formation plus net exports). All three should produce similar results, with minor differences arising from statistical error.

And it makes one point about interpretation: per capita income, not national income, is the better measure of the standard of living, because national income can rise while population rises faster.

GNP = GDP + Net Factor Income from Abroad

NFIA = Income received by residents from abroad
     − Income paid to non-residents

Per capita income = National income ÷ Total population

Take an illustrative year in which India's GDP is Rs 300 lakh crore.

Indian residents earn Rs 5.20 lakh crore abroad — salaries of nationals working overseas, dividends and interest on foreign assets, and profits of overseas subsidiaries.

Foreign-owned companies and non-residents earn Rs 8.60 lakh crore inside India and take it out — repatriated profits of multinationals, interest on external commercial borrowings, expatriate salaries.

NFIA = 5.20 − 8.60 = − Rs 3.40 lakh crore
GNP  = 300 + (−3.40) = Rs 296.60 lakh crore

GNP is 1.13% below GDP — the ordinary position for an economy that hosts more foreign capital than it owns abroad.

Divide by a population of 145 crore:

GDP per capita = 300,00,000 crore ÷ 145 crore  ≈ Rs 2,06,900
GNP per capita ≈ Rs 2,04,600

Now reverse the two flows — residents earning Rs 8.60 lakh crore abroad against Rs 5.20 lakh crore paid out — and GNP rises above GDP by Rs 3.40 lakh crore. That is the pattern in economies whose people work abroad in large numbers and send the earnings home.

Chapter 5 (Economic Analysis, section 5.3.1) defines GDP, GNP and NFIA together and then sets out the three methods of measuring national income. Expect a definitional question distinguishing GDP from GNP, and a question on which is the better measure of standard of living — per capita income, not national income.

• GDP is geography, GNP is nationality. Fix that and every other question in the section follows.
• GNP = GDP + NFIA, and NFIA is routinely negative for India, so GNP normally sits below GDP. Adding a positive NFIA by reflex is the standard error.
• The workbook says the expenditure-method aggregate demand "is also sometimes referred as GNP" (Chapter 5.3.1). By that same section's own definitions, private consumption plus government spending plus gross capital formation plus net exports contains no NFIA and is therefore GDP. Both sentences are in Chapter 5; answer the definition the question is testing.
• All three counting methods should agree, give or take statistical error. If a question implies one is "correct", it is testing the definitions, not a ranking.
• Per capita income is the living-standard measure. National income can grow while per capita income falls.
• The workbook states that the service sector is 60% of India's GDP at factor cost. That figure is dated — the services share of gross value added has been in the mid-fifties in recent years — but it is the workbook's number, so it is the exam's number.