January 23, 2019

Clearing up the confusion about getting better off: GDP and GNP

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GDP (PPP) Per Capita based on 2008 estimates h...

GDP (PPP) Per Capita based on 2008 estimates http://www.imf.org/ (Photo credit: Wikipedia)

When you read in the papers that GDP (Gross Domestic Product) has increased over the past year you naturally conclude that we are all better off. But don’t be fooled. GDP is what is produced in the economy not the income earned by residents. Students of economics will know that national income is equal to GNP (Gross National Product) which is GDP adjusted for income earned from assets owned abroad and income sent abroad to owners of assets in this country (this is often called net factor incomes from abroad). There can be a significant difference between GNP and GDP, for example as the Economist points out  in 2011 Irish GDP was 20% higher than Irish GNP because of the profits earned by foreign firms. As a result using GDP national income was 7% smaller in 2011 than 2011, but using GNP it was 11% smaller.

So why do governments produce statistics on GDP rather than GNP? Because GDP is easier to produce and it is argued that trends in GDP are close enough to GNP that it does not matter. But as you will see for Ireland it does matter. So wherever you live take a hard look at the latest GDP figures: they probably paint an unduly rosy picture of reality.