ECONOMIC GROWTH – WHAT ARE GDP AND GNP AND HOW ARE THEY OBTAINED?

Todaro (2000) defines economic growth as a sustained increase in income (GDP and GNP) at rates perhaps 5 – 7% or more. This article is concerned about the components of Gross Domestic Product (GDP) and the link between GDP and Gross National Product (GNP) which are used in measuring or determining economic growth.

GDP is a measure of the output produced by factors of production located in the domestic economy irrespective of who owns these factors of production. This involves summing up all goods and services produced by all sectors of the economy valued at their market prices, including capital goods, inventory and net exports (exports minus imports). Inventories or stocks are goods currently held by a firm for future production or sale

The sectors of the economy under considering include agriculture, industry, services, manufacturing, construction, utilities, transport and communication etc. some of the goods produced in the domestic economy have foreign components especially the raw materials imported for their production .The value of these raw materials must be subtracted since they were not produced domestically and since we are measuring GDP. In the same manner certain goods produced in the domestic economy are exported and the value of these exports must be added to the GDP estimates. The difference between these two items must be added to obtain GDP at market prices (because output is valued at market prices). GDP at market prices measures domestic output inclusive of indirect taxes on goods and services. To the estimates so obtained, we add net international trade or net export to obtain the GDP.

The connection between GDP and GNP is that, GNP is GDP plus net factor income from abroad. By definition, GNP is the market value of all final goods and services produced during some particular time period in a country by the nationals or normal residents of that country, regardless of where these normal residents produced this output. The net factor income from abroad is the difference between income earned by nationals of a country who have investments abroad and income earned by foreigners within the domestic economy of the country under consideration.