GDP is one of the most widely used indicators of a country’s economic size. However, GDP alone cannot explain every aspect of an economy.
GDP measures the value of production that takes place within a country’s borders, but that is different from asking who ultimately receives the income generated by that production. In addition, countries have different price levels, so simply converting GDP using market exchange rates may not fully reflect differences in actual economic activity.
This is where GNP, GNI, NNP, and PPP become useful.
In this article, we will explain what each concept means, how they differ from GDP, and how PPP is used when comparing the economies of different countries.
1. What Is GDP?
GDP (Gross Domestic Product) is the total value of final goods and services produced within a country’s borders during a specific period.
The most important point about GDP is that it is based on where production takes place, not on the nationality of the people or companies doing the producing.
For example, if a U.S. company operates a factory in South Korea and produces cars there, that production is included in South Korea’s GDP.
On the other hand, if a South Korean company produces cars at a factory in the United States, that production is included in U.S. GDP.
GDP can also be expressed from the expenditure side as:
GDP = C + I + G + (X – M)
- C: Household consumption
- I: Investment by businesses and households
- G: Government spending
- X: Exports
- M: Imports
If GDP shows how much production takes place within a country, we can ask another question.
Who actually receives the income generated by that production?
To understand this question, we need to look at GNP and GNI.
2. What Are National Accounts?
Before looking at GNP and GNI, it helps to understand the concept of national accounts.
National accounts are a system of statistics used to record and organize a country’s economic activity.
A company’s accounting records sales, costs, profits, and other financial information for that company. National accounts do something similar for an entire economy, recording production, income, consumption, investment, saving, and international transactions within a common framework.
GDP is one of the most important indicators included in national accounts.
National accounts allow the same economic activity to be viewed from different perspectives, including production, income, and expenditure.
For example, when a company produces a product, that activity is included in GDP from the production perspective. The wages paid to workers and profits generated by the production process are reflected as income, while the consumption or investment of the resulting goods appears as expenditure.
GNP and GNI can therefore be understood much more easily when viewed as part of the broader national accounts system.
3. What Is GNP?
GNP (Gross National Product) is a concept that measures total production associated with the income of a country’s residents over a given period.
While GDP is based on where production takes place, GNP focuses on the production and income associated with a country’s residents, including production-related income earned abroad.
For example, suppose a South Korean company operates a factory overseas. The production from that factory is included in the GDP of the country where the factory is located. At the same time, the portion of income generated by that production that belongs to South Korean residents is reflected in South Korea’s national economy.
Conversely, if a foreign company produces goods in South Korea, that production is included in South Korea’s GDP. However, the portion of income generated by that production that belongs to foreign factors of production is not income belonging to South Korean residents.
Conceptually, GNP can be understood as:
GNP = GDP + Primary income received from abroad – Primary income paid abroad
In other words, start with GDP, add primary income received by domestic residents from abroad, and subtract primary income paid to foreign residents from domestic production.
In modern national accounts, however, the term GNI is used much more commonly than GNP.
For this reason, it is useful to think of GNP and GNI as referring to essentially the same broad national economic concept, with GNP being the older production-oriented term and GNI being the modern income-oriented term.
4. What Is GNI?
GNI (Gross National Income) measures the total amount of primary income attributable to a country’s residents during a given period.
If GNP was historically used to describe production associated with a country’s residents, GNI expresses the income generated through production and international transactions from an income perspective.
The key distinction can be summarized as follows:
- GNP: A concept historically used to describe total production attributable to a country’s residents
- GNI: The total amount of primary income attributable to a country’s residents
GNI can be calculated as:
GNI = GDP + Primary income received from abroad – Primary income paid abroad
Primary income includes income such as wages, interest, dividends, and operating profits that arise from production or ownership of assets.
In modern national accounts, GNP and GNI essentially reflect the same net flow of income.
Rather than thinking of them as two completely different measures of economic size, it is more useful to understand that GNP is the older concept and GNI is the term more commonly used today.
5. How Are GDP and GNI Different?
The easiest way to understand the difference between GDP and GNI is to think about the question each one answers.
- GDP: How much was produced within the country?
- GNI: How much primary income was attributable to the country’s residents through domestic and international economic activity?
For example, when a foreign company produces goods in South Korea, that production is included in South Korea’s GDP.
However, the portion of income generated by that production that belongs to foreign factors of production is not income belonging to South Korean residents. It is therefore reflected as primary income paid abroad when calculating GNI.
Conversely, wages, interest, and dividends earned abroad by South Korean residents are included in South Korea’s GNI as primary income received from abroad.
GDP and GNI therefore answer different questions.
GDP shows production taking place within a country, while GNI shows the primary income attributable to its residents.
6. What Is NNP?
NNP (Net National Product) is the concept of GNP minus the consumption of fixed capital.
When businesses use factories, machinery, and other capital goods, those assets gradually wear out or lose value through use. This is generally described as depreciation or consumption of fixed capital in national accounts.
NNP can therefore be understood as:
NNP = GNP – Depreciation
For example, if GNP is $1 trillion and depreciation is $100 billion, NNP is $900 billion.
In other words:
- GNP: Gross national production
- NNP: Net national production after accounting for the consumption of capital
However, because GNI is now more commonly used than GNP in modern national accounts, NNP is not a measure that people encounter as often as GDP or GNI.
7. GDP, GNP, GNI, and NNP at a Glance
The main concepts can be summarized as follows.
| Indicator | Meaning | Key basis |
|---|---|---|
| GDP | Gross Domestic Product | Production within a country’s borders |
| GNP | Gross National Product | A historical concept focused on production attributable to residents |
| GNI | Gross National Income | Primary income attributable to residents |
| NNP | Net National Product | GNP minus depreciation |
The most important difference is that GDP is based on where production takes place, while GNP and GNI focus on production or income attributable to a country’s residents.
And in modern national accounts, GNI is generally used instead of GNP.
This leads to another question.
How should we compare the GDP of different countries?
South Korea’s GDP is measured in Korean won, while U.S. GDP is measured in U.S. dollars. To compare the two, we need to convert them into a common currency.
The first method that comes to mind is the market exchange rate.
However, market exchange rates do not necessarily reflect differences in price levels between countries.
This is where PPP becomes important.
8. What Is PPP?
PPP (Purchasing Power Parity) is a concept used to compare the economic size and income of different countries while taking differences in price levels into account.
One important point is that PPP should not be thought of as a score showing how “strong” one country’s currency is.
PPP compares price levels between countries and provides a basis for converting different currencies for economic comparisons.
The numerical measure used for this purpose is called a PPP conversion factor.
For example, suppose we have the following:
- Market exchange rate: $1 = ¥150
- PPP conversion factor: $1 = ¥100
The market exchange rate is the actual price at which the U.S. dollar and Japanese yen are traded in the foreign exchange market.
By contrast, a PPP conversion factor of $1 = ¥100 means, in a simplified example, that ¥100 in Japan has approximately the same purchasing power as $1 in the United States when comparing the prices of goods and services.
It does not mean that you can actually buy $1 for ¥100 in the foreign exchange market.
The actual exchange rate and a price-level-adjusted conversion factor serve different purposes.
9. Understanding PPP With a Simple Example
Let’s look at how a PPP conversion factor works with a simple example.
Suppose a particular product costs $2 in Country A and $1 in Country B.
In other words, the same product costs half as much in Country B as it does in Country A.
If we compare the prices of many different goods and services in the same way, we may find that the overall price level in Country B is lower than in Country A.
By combining these price differences across many goods and services, we can calculate a PPP conversion factor. This can produce a different measure of economic size from one based solely on market exchange rates.
For example, suppose the GDP of Country A and Country B is as follows when converted using market exchange rates:
- Country A GDP: $1 trillion
- Country B GDP: $800 billion
Using market exchange rates, Country A has the larger economy.
However, suppose that, after accounting for differences in the prices of goods and services, Country B’s GDP is equivalent to $1.6 trillion when measured using PPP.
The comparison would then look like this:
| Country | GDP at Market Exchange Rates | GDP at PPP |
|---|---|---|
| Country A | $1 trillion | $1 trillion |
| Country B | $800 billion | $1.6 trillion |
In this example, Country A has a larger GDP at market exchange rates, while Country B has a larger GDP at PPP.
The important point is that Country B’s actual production did not suddenly increase from $800 billion to $1.6 trillion.
The difference comes from using two different conversion methods: one based on market exchange rates and another that accounts for differences in price levels.
In practice, PPP is not calculated from the price of a single product.
It incorporates prices across a broad range of goods and services, including food, housing, transportation, healthcare, and education, to reflect relative price levels across countries.
Therefore, it would be incorrect to say that “if Country B’s prices are half as high, its GDP will be exactly twice as large.”
The $2 and $1 product example is simply a way to understand why PPP is useful. Likewise, the $1 trillion and $1.6 trillion figures are hypothetical numbers used to illustrate how the results can differ when PPP is applied.
10. How Does GDP at PPP Compare Economic Size?
Let’s look at the previous example in a little more detail.
We assumed that a particular product costs $2 in Country A but only $1 in Country B.
If there are many goods and services with similar price differences, we can see that the same amount of money can purchase more goods and services in Country B.
As a result, comparing the GDP of two countries using only market exchange rates can produce a different result from comparing them after taking differences in price levels into account.
Suppose GDP at market exchange rates is:
- Country A: $1 trillion
- Country B: $800 billion
At market exchange rates, Country A has the larger economy.
But suppose that after comparing the prices of many different goods and services, Country B’s price level is lower than Country A’s. If the PPP conversion factor results in Country B’s GDP being equivalent to $1.6 trillion, the comparison becomes:
| Country | GDP at Market Exchange Rates | GDP at PPP |
|---|---|---|
| Country A | $1 trillion | $1 trillion |
| Country B | $800 billion | $1.6 trillion |
This makes it easier to see why PPP can be useful.
GDP at market exchange rates converts economic output using the actual exchange rate at which currencies are traded in financial markets.
GDP at PPP, on the other hand, takes differences in the cost of goods and services into account when comparing economic size.
As a result, the economy of a country with relatively low prices may appear larger when measured using PPP than when its GDP is simply converted using market exchange rates.
However, actual PPP GDP is not calculated by simply saying, “If prices are half as high, GDP becomes exactly twice as large.”
PPP conversion factors are calculated by comparing prices across a broad range of goods and services, and those factors are then applied to GDP.
The numbers above are therefore hypothetical examples used to explain the principle behind PPP.
11. Does GDP per Capita at PPP Show Living Standards?
The total size of an economy and the economic level of the average person are not the same thing.
Suppose Country A and Country B both have populations of 100 million.
If their GDP at PPP is:
- Country A: $1 trillion
- Country B: $1.6 trillion
GDP per capita at PPP can be calculated as follows:
- Country A: $1 trillion ÷ 100 million people = $10,000
- Country B: $1.6 trillion ÷ 100 million people = $16,000
In this hypothetical example, Country B has a higher GDP per capita at PPP.
GDP per capita at PPP is useful when comparing average economic levels across countries because it takes both population and differences in price levels into account.
However, this does not mean that “people in Country B have a higher standard of living in every respect.”
Actual living standards are also affected by factors such as:
- Income distribution
- Housing costs
- Healthcare
- Education
- Public services
- Working hours
- Social security
- Quality of life
Therefore, GDP at PPP can be used to compare the overall economic size of countries, while GDP per capita at PPP can be used to compare average economic levels while accounting for population and price differences.
12. What Are the Limitations of PPP?
PPP is useful for comparing economies across countries, but it is not a perfect measure.
First, countries have different products, services, qualities, and consumption patterns, making it difficult to compare every price perfectly.
Second, prices for areas such as housing, healthcare, and education can vary substantially between countries. The results can therefore depend on which goods and services are included and how they are measured.
Third, PPP conversion factors are different from actual foreign exchange rates.
For situations such as international travel or purchasing imported goods, market exchange rates are more directly relevant because actual currency transactions are involved.
For comparisons of economic size or average economic conditions where differences in price levels matter, however, PPP can be more useful.
13. GNP, GNI, NNP, and PPP: Key Takeaways
Here is a quick summary of the concepts covered in this article.
- GDP: The value of final goods and services produced within a country’s borders
- GNP: A historical concept describing total production attributable to a country’s residents
- GNI: The total amount of primary income attributable to a country’s residents
- NNP: Net national production after subtracting depreciation from GNP
- PPP: A concept used to compare economic size and income while accounting for differences in price levels
- PPP conversion factor: A currency conversion measure that reflects differences in price levels between countries
- GDP at PPP: GDP converted using PPP to account for differences in price levels
- GDP per capita at PPP: A measure used to compare average economic levels across countries while accounting for population and price differences
Ultimately, these concepts answer different questions.
GDP shows how much is produced within a country.
GNP is a historical concept that describes production attributable to a country’s residents and was traditionally used to represent gross national production.
GNI shows how much primary income is attributable to a country’s residents.
NNP shows net national production after accounting for the consumption of capital.
PPP provides a way to compare economic size and income while taking differences in price levels between countries into account.
Most importantly, PPP is not a measure of which country’s currency is “stronger.” It is a tool for comparing economic activity across countries on a more comparable basis by accounting for differences in price levels.