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While gross domestic product (GDP) is among the most popular of economic indicators, gross national income (GNI) is quite possibly a better metric for the overall economic condition of a country whose economy includes substantial foreign investments.
This is because GNI calculates an economy’s total income, regardless of whether the income is earned by citizens and residents within the country’s borders or outside of them (e.g., from investments in foreign business or from foreign aid).
Depending on the country, GNI and GDP may vary considerably because of the basic fact that they measure different things.
Key Takeaways
- Gross domestic product (GDP) and gross national income (GNI) are two measures of economic activity, but what they measure differs.
- GDP looks at the production level of an economy or the total annual value of what is produced in the nation; it measures an economy’s size and growth rate.
- GNI is the total dollar value of everything produced by a country and the income its residents receive—whether it is earned at home or abroad.
- GDP is useful for central banks when enacting monetary and fiscal policies, but it is a flawed measure that may not account for the reasons and likely duration of an economic upturn or downturn.
- GNI can be useful to consider as an alternative to GDP, particularly as a way to understand the totality of income received by citizens and residents.
Gross Domestic Product
Gross domestic product (GDP) is a metric that measures the production level of a country’s economy, commonly defined as the total annual value of the goods and services produced in that country.
GDP is one of the well-known economic indicators widely used by both investors and market analysts. It is intended to gauge the overall size, in terms of productive output, of an economy, as well as its current growth rate.
Central banks often rely on the GDP figures to determine how well an economy is functioning, and whether it is more susceptible to inflationary or recessionary pressures.
Based on GDP and other fundamental economic metrics, economists make decisions regarding taxes, government spending, and monetary and fiscal policies that can have a significant impact on a nation’s economy for years to come.
Because GNI focuses on income and GDP focuses on production, for some countries, GNI and GDP figures can be quite different (especially those that receive federal aid). In the U.S., they are usually similar. For 2023, U.S. GNI was $27.53 trillion and GDP was $27.36 trillion.
Shortcomings of Gross Domestic Product
In spite of its popularity as an economic indicator, GDP has a number of potential shortcomings.
- It fails to properly attribute economic upturns or downturns to genuine changes in the economy’s health or to just temporary, cyclical fluctuations.
- It sometimes leads to overcorrections by government authorities, such as the U.S. Federal Reserve, creating situations where monetary policy is tightened to reduce inflationary pressures.
- This can lead to a threat of recession and an easing of money supply restrictions, which leads to inflationary pressures.
- GDP specifically falls short in its failure to consider income earned outside of the country.
Gross National Income
National income (GNI) is the total amount of income that a country’s people and businesses earn (such as income from properties and employee compensation). It includes not only an amount for GDP but income that comes from outside the nation (such as investment income and foreign aid).
The major strength of GNI as an economic metric is the fact that it recognizes all income that goes into a national economy, regardless of whether it is earned within the country or overseas.
GNI is a helpful metric to consider simply by virtue of the fact that it provides an alternative perspective to that provided by GDP and can, therefore, aid analysts in obtaining a more complete picture of total economic activity.
GNI and GNP
There is very little difference between GNI and gross national product (GNP) (another alternative metric to GDP). The U.S. replaced GNP with GNI in 1993. The GNP figure represented the total amount of production generated by people and businesses native to a country, including those based outside the country.
Shortcomings of Gross National Income
While useful for the additional view of a nation’s economy that it provides, GNI has drawbacks.
- GNI can be misleading when used to compare countries because it doesn’t account for differences in the size of populations.
- It accounts only for income in terms of economic development and offers no insight into quality of life.
- GNI figures for countries with different currencies must be converted to a common currency and thus may not accurately reflect a specific country’s purchasing power.
What’s the Difference Between GDP and GNI?
GDP is concerned with the value of all goods and services produced within a country and specific period of time. GNI is concerned with the total income earned by citizens and residents and includes money received from sources outside a country.
How Is GNI Calculated?
Generally speaking, GNI equals the sum of a country’s income and indirect business taxes and depreciation plus net foreign factor income (the payments made to domestic businesses less those made to foreign businesses).
Who Produces the Numbers for GNI and GDP?
The Bureau of Economic Analysis (BEA) reports GDP and GNI figures. They’re subsequently reported by other sources, as well. For instance, the St. Louis Federal Reserve Bank provides an illuminating historical view of annual GNI figures for the U.S.
The Bottom Line
Gross Domestic Product and Gross National Income are two measurements of economic activity. The first, GDP, reflects the state of the economy by way of the value of a nation’s production. The second, GNI, reflects income (earned domestically and abroad) as well as gross national product.
