GDP - Gross Domestic Product GDP vs. GNP 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?

Accepted Answer

It is included in U.S. GDP but excluded from U.S. GNP.

Answer

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)?

Accepted Answer

GNP = GDP + Net Property Income from Abroad

Answer

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?

Accepted Answer

GDP will be significantly lower than GNP.

Answer

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:

Accepted Answer

U.S. GNP and Canadian GDP.

Answer

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?

Accepted 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.

Answer

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.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product GDP vs. GNP Questions and Answers