Gross National Income

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Gross National Income

Gross national income (GNI), also known as gross national product (GNP), is an estimate of the value of goods and services produced in an economy. In other words, it is an estimate of the size of an economy. This measure is highly important, having economic, political, and societal implications.

The GNI is defined as the total value of final goods and services produced within a country’s borders in a year, thus the country’s gross domestic product (GDP), minus its net foreign assets. The net foreign assets are composed of the income received from assets owned by nationals in other countries minus similar payments made to foreigners who own assets in the national economy. For instance, if a Japanese-owned company operates in the United States and sends some of its profits back to Japan, then the Japanese GNI is enhanced. However, the repatriation of profit from a U.S. company operating in Japan increases the U.S. GNI but does not affect the Japanese GNI. Hence, unlike GDP, the GNI counts income produced according to who owns the factors of production rather than where it is earned. The conversion from GNI to GDP can easily be done by subtracting the income received from domestically owned goods and services that have been supplied to the production abroad of foreign goods and services. However, the conversion from GDP to GNI requires that one add to GNI the income payments to foreigners for the use of their goods and services supplied to the domestic economy. Thus:

GNI = GDP + Net Foreign Assets

where Net Foreign assets = Foreign Assets –Foreign Liabilities.

The measure of GNI is of great policy significance. GNI, consisting of a basic measure of national income accounting, has been regarded since World War II as an important indicator of the status of the economy. For instance, in the United States the economy is considered to be in recession if GNI decreases during two consecutive quarters. Moreover GNI, as a measure of economic health, is used for the purpose of cross-country comparisons. For example, one defines the importance of an economy according to the level of its GNI or according to each country’s contribution to the world’s income production. In addition GNI per person is often used as a measure of people’s welfare. Thus countries with high GNI often score high on other measures of welfare.

As previously mentioned, GNI is a function of the GDP. The latter is more common as a measurement of the size of an economy. In some cases the difference between the two measures is negligible. For instance, in the United States the difference between GDP and GNI is only about 1 percent and can be ignored. However, in some countries where net foreign assets’ role is significant, GNI is considered to be the most representative quantitative measure of economic activity. This is the case, for example, in Ireland, where in 2000 GDP was 15 percent higher than GNI. In any case, GNI has important policy implications, both at a national level and at an international level (for example, it defines a country’s status in an international organization).

SEE ALSO Gross Domestic Product; National Income Accounts