Terms Related to International Business - What are GDP and GNP?

Gross Domestic Product (GDP), Gross National Product (GNP), and Purchase Power Parity (PPP) are economic tools used by governing officials and economists to measure and compare the overall productivity of each country. Economists devised these measures in order to gain a clear picture of each countries economic productivity and power and how that each nation's economic productivity and power compares to other countries around the world. This hub provides an introduction to the concepts of GDP, GNP, and PPP and how that relate to international business and global trade.

Satterlee (2009), Johnson (2005), and Moffatt (2013) provided the following definitions of gross domestic product, gross national product, and purchasing power parity:

Definition of Gross Domestic Product

Gross Domestic Product is the official measure of total output of goods and services in a nation's economy. More specifically, GDP is the total market value of all the goods and services produced within the borders of a nation during a specified time (usually reported in terms of a fiscal year).

GDP figures from around the world are most often reported in terms of US Dollars, as the USD is the currency currently used as the international monetary standard.

GDP figures are reported in a number of ways including: (a) GDP current USD; (b) GDP purchasing power parity (GDP PPP); (c) GDP per capita; (d) % GDP growth current USD; and (e) % GDP growth per capita.

GDP Purchasing Power Party is seen by many as the true barometer of economic stability and strength. GDP PPP takes into account changes in the cost of living as impacted by inflation over time.

GDP per capita is another important measure. GDP per capita illustrates a country's respective economic output when divided by the total population. GDP PPP per capita can give a more accurate picture of the relative productivity and wealth of citizens within a given country.

Definition of Gross National Product

Gross National Product (GNP) measures the total market value of all the goods and services produced by a nation during specified period. More specifically, GNP is an estimation of the total money value of all the goods and services produced by factors of production owned by residents of a particular country including goods and services produced outside the borders of that country (Johnson, 2005). But unlike GDP, GNP measures include goods and services produced both inside and outside a nation's borders. That is, GNP includes income produced by citizens doing business in foreign countries. For instance, if I owned two garment manufacturing businesses - one in the USA and the other in Cambodia, the income generated from both businesses would be included in the USA's GNP, but only the income produced within the borders of the USA would be included in the USA's GDP.

Definition of Purchasing Power Parity

Purchasing Power Parity (PPP) can be defined as the price equivalence of a particular product sold in two or more countries given the exchange rate of one currency to another. More specifically, " PPP theory states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that exchange rate are equivalent" (Moffatt, 2013). For instance, at the time this article was written, the exchange rate of the US Dollar to Japanese Yen was roughly 1 USD to 101 Yen. If a watermelon of a certain weight costs $3.00 in the US then the theory of purchasing price parity would indicate the USD would be in equilibrium with the Yen if in Japan the same watermelon cost 303 Yen. If 5 years later the the exchange rate of USD to Yen moves to 1 to 120 and a watermelon of the same weight costs $5.00 in the USA, then a watermelon of the same weight in sold in Japan should sell for 600 Yen for PPP equilibrium to be maintained.

GDP, GNP, and PPP Comparative Measures

As so described above, GDP, GNP, and PPP serve as measures used to compare the productivity of nations in terms of growth of their own domestic economies as well as the strength of their respective economies in comparison to other countries and regions of the world.

Satterlee, B. (2009). Cross Borders Commerce.

Johnson, P. (2005). A Glossary of Political Economy Terms. Retrieved from www.auburn.edu.

Moffatt, M. (2013). A Beginner's Guide to Purchasing Power Parity Theory (PPP Theory). About.com economics. Retrieved from economics.about.com.