GDP - Gross Domestic Product GDP vs. GNP Questions and Answers — Questions and Answers
Question 1: A German automobile company operates a large manufacturing plant in the United States. The profits earned by this plant are repatriated to the company's headquarters in Germany. How is the value of the cars produced in this plant accounted for in the national income accounts of the United States?
- It is included in U.S. GDP but excluded from U.S. GNP. (Correct answer)
- It is included in U.S. GNP but excluded from U.S. GDP.
- It is included in both U.S. GDP and U.S. GNP.
- It is excluded from both U.S. GDP and U.S. GNP.
Correct answer: It is included in U.S. GDP but excluded from U.S. GNP.
GDP measures the value of all goods and services produced within a country's borders, regardless of who owns the production assets. Since the plant is located in the U.S., its output is part of U.S. GDP. GNP, however, measures the value of goods and services produced by a country's residents. Because the company is German-owned, the profits are repatriated and counted towards Germany's GNP, not the U.S. GNP.
Question 2: Which of the following equations correctly represents the relationship between Gross National Product (GNP) and Gross Domestic Product (GDP)?
- GNP = GDP - Net Exports
- GNP = GDP + Net Property Income from Abroad (Correct answer)
- GNP = GDP + Depreciation
- GNP = GDP - Indirect Business Taxes
Correct answer: GNP = GDP + Net Property Income from Abroad
GNP is calculated by starting with GDP and adjusting for international income flows. Specifically, GNP adds the income that domestic residents earn from overseas investments and subtracts the income that foreign residents earn within the domestic country. This adjustment is known as Net Property Income from Abroad (or Net Factor Income from Abroad).
Question 3: In a country where a large portion of the labor force works abroad and sends significant remittances back home, which of the following relationships between GDP and GNP is most likely?
- GDP will be approximately equal to GNP.
- GDP will be significantly lower than GNP. (Correct answer)
- GDP will be significantly higher than GNP.
- There is no predictable relationship between GDP and GNP in this scenario.
Correct answer: GDP will be significantly lower than GNP.
GNP includes all income earned by a country's residents, regardless of their location. Significant income from citizens working abroad (remittances) is added to GDP to calculate GNP. GDP only measures production within the country's borders and does not include these remittances. Therefore, in such an economy, GNP will be notably higher than GDP.
Question 4: An American citizen is an accomplished architect who lives and works for a firm in Canada. The income she earns is included in:
- U.S. GDP and Canadian GNP.
- U.S. GNP and Canadian GNP.
- U.S. GDP and Canadian GDP.
- U.S. GNP and Canadian GDP. (Correct answer)
Correct answer: U.S. GNP and Canadian GDP.
The architect's production occurs within Canada's borders, so her income is part of Canada's GDP. Because she is an American citizen, her income is considered income earned by a national from abroad and is therefore included in the U.S. GNP. It is not part of U.S. GDP (not produced in the U.S.) or Canadian GNP (she is not a Canadian national).
Question 5: Which of the following statements provides the most accurate distinction between the focus of GDP and GNP?
- GDP focuses on the total spending by consumers and government, while GNP focuses on total investment.
- GDP measures the economic output based on the geographical location of production, while GNP measures the output based on the ownership of the factors of production. (Correct answer)
- GDP includes only final goods, while GNP includes both final and intermediate goods.
- GDP is an inflation-adjusted measure, while GNP is a nominal measure.
Correct answer: GDP measures the economic output based on the geographical location of production, while GNP measures the output based on the ownership of the factors of production.
The fundamental difference lies in what each metric measures. GDP is location-based; it measures all production within a country's geographical borders. GNP is ownership-based; it measures all production by the citizens and firms of a country, regardless of where that production takes place.
Question 6: Country X has a GDP of $500 billion. The income earned by its citizens abroad is $75 billion, and the income earned by foreign residents within Country X is $50 billion. What is the Gross National Product (GNP) of Country X?
- $475 billion
- $500 billion
- $525 billion (Correct answer)
- $625 billion
Correct answer: $525 billion
The formula to calculate GNP from GDP is: GNP = GDP + Net Factor Income from Abroad. Net Factor Income from Abroad is the income earned by citizens abroad minus the income earned by foreigners domestically. In this case, Net Factor Income is $75 billion - $50 billion = $25 billion. Therefore, GNP = $500 billion + $25 billion = $525 billion.
GDP - Gross Domestic Product GDP vs. GNP Questions and Answers
A German automobile company operates a large manufacturing plant in the United States.
The profits earned by this plant are repatriated to the company's headquarters in Germany.
How is the value of the cars produced in this plant accounted for in the national income accounts of the United States?