1.1. GNP Vs. GDP
a. We can measure the aggregate output of a country by using the gross national product (GNP) or the gross domestic product (GDP), which differs with respect to goods and services produced by foreigners and by its citizens abroad.
b. GDP, which is more commonly used as a measure of the national income, is the market value of final goods and services, produced by the factors of production, located within a country or economy. It is the total value of all goods and services provided by a country during a specific period of time.
c. Whereas, GNP is the market value of final goods and services, produced by the factors of production, supplied by the citizens of a country either in or out of a country. It is the total value of all goods and services consumed, government outlays, investments, and exports less
d. Therefore:
i. The production of goods and services by foreigners in the country is included in the GDP but not in the GNP.
ii. And, production outside the country by its citizens is included in the GNP but not in GDP.
e. Thus the relationship between the GDP and GNP can be explained as follows:
Particulars |
Gross National Product (GNP) |
Add: |
Production of Goods and Services by Foreigners Within the Country |
Subtract: |
Production of Goods and Services by the Country’s Citizens Outside the Country |
Equals: |
Gross Domestic Product (GDP) |
f. The difference between the two measures of performance relates to international trade.
1.2. Other Terminology
a. Imports are goods and services that a domestic economy purchases from other countries.
b. Exports are goods and services that a domestic economy sells to other countries.
c. The value of exports minus the value of imports in a country is called its net exports.
Net Exports = Exports – Imports |
i. If the value of net exports is zero, then it is the situation of balanced trade.
ii. If net exports are greater than zero then there is a surplus.
iii. If the net exports are less than zero then there is a deficit.
d. The terms of trade are the ratio of the price of exports to the price of imports. It can be calculated as follows:
Terms of Trade = (Export Price Index) / (Import Price Index) |
This index is set to 100 in some base year.
i. If the value of this index is greater than zero, it indicates increasing terms of trade. It means fewer exports are needed to pay for the same level of imports.
ii. If the value of this index is less than zero, it indicates decreasing terms of trade. It means more exports are needed to pay for the same level of imports.
e. A country that does not trade with other countries is referred to as a closed economy or being in autarky; the price of goods and services is the autarkic price.
f. An economy that is not closed is an open economy.
If there are no restrictions on trade, the price of goods and services in the world price.
g. Free trade is the case in which there are no restrictions on a country’s trade with other countries.
Here, the global aggregate demand and global aggregate supply determine the equilibrium level of quantity and equilibrium prices of exports and imports.
h. Trade protections are restrictions on trade that prevent pricing based on supply and demand, in the form of tariffs, quotas, etc.
Capital restrictions are limits on the flow of funds into or out of a country.
i. The degree of foreign trade can be measured using one of the two benchmarks:
i. Trade as a percentage of GDP.
ii. Foreign direct investment (FDI), that is, the amount of investment by a firm in one country in the assets in another country.
j. A multinational corporation (MNC) is a company that operates in more than one country.
k. A foreign portfolio investment (FPI) is a short-term investment in foreign financial instruments.