From GDP to GNP

To complete our description of the national accounts we must deal with two final problems. Thus far we have assumed that all factors of production are domestically owned: all net domestic output accrues to domestic households as factor incomes. But this need not be the case. When Nissan or Peugeot owns a car factory in the UK, some of the profits will be sent back to Japan or France to be spent or saved by Japanese or French households. Similarly, when immigrant workers send some of their wage packets back home to support relatives, or foreign owners of UK property or shares in UK companies send home some of their income from property rents or company dividends, there is a discrepancy between the factor incomes earned in the UK and the factor incomes accruing to UK households.

Conversely, UK households earn income from factor services that they supply in foreign countries. Since most of these income flows between countries are not labor income but income from interest, dividends, profits, and rents, they are shown in the national accounts as the flow of property income between countries. The net flow of property income into the UK is the excess of inflows of property income from factor services supplied abroad over the outflows of property income arising from the supply of factor services by foreigners in the UK.

When there is a net flow of property income between the UK and the rest of the world, the output and expenditure measure of GDP will no longer equal the total factor incomes earned by UK citizens. We use the term gross national product (GNP) to measure GDP adjusted for net property income from abroad.

GNP measures total income earned by domestic citizens regardless of the country in which their factor services were supplied. GNP equals GDP plus net property income from abroad.

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