GDP Vs. GNP 3 — Questions and Answers
Question 1: In the late 1980s, the U.S. switched from using GNP to GDP as its primary national accounts measure. What was the main reason?
- GNP was considered too difficult to calculate
- GDP allows easier international comparisons since most countries use it (Correct answer)
- GNP double-counts imported goods
- GDP better captures underground economic activity
Correct answer: GDP allows easier international comparisons since most countries use it
The U.S. adopted GDP in 1991 primarily to align with international standards and allow more consistent cross-country comparisons.
Question 2: Country X has GDP of $500 billion, income paid to foreign factors of $40 billion, and income received from abroad by residents of $30 billion. What is Country X's GNP?
- $570 billion
- $490 billion (Correct answer)
- $530 billion
- $460 billion
Correct answer: $490 billion
GNP = GDP + income from abroad − income to foreigners = $500B + $30B − $40B = $490 billion.
Question 3: Which scenario would cause a country's GNP to exceed its GDP?
- Many foreign workers are employed domestically
- Residents earn more abroad than foreigners earn domestically (Correct answer)
- The country runs a large trade deficit
- Government spending exceeds tax revenue
Correct answer: Residents earn more abroad than foreigners earn domestically
When residents' foreign earnings exceed what foreigners earn domestically, NFIA is positive, pushing GNP above GDP.
Question 4: The concept most similar to GNP in modern national accounting terminology is:
- Gross National Expenditure (GNE)
- Gross National Income (GNI) (Correct answer)
- Gross Domestic Income (GDI)
- Net Domestic Product (NDP)
Correct answer: Gross National Income (GNI)
GNI has largely replaced GNP in modern usage; both measure income earned by a country's residents regardless of location.
Question 5: A developing country with a large diaspora sending remittances home would see its GNP relative to GDP:
- Lower, because remittances are not factor income
- Higher, because diaspora earnings abroad add to GNP (Correct answer)
- Equal, because remittances cancel with imports
- Lower, because emigrants reduce the domestic labor force
Correct answer: Higher, because diaspora earnings abroad add to GNP
Earnings by residents working abroad are factor income counted in GNP, so a large working diaspora raises GNP above GDP.
Question 6: Which statement about GDP and GNP is TRUE for a closed economy (no international transactions)?
- GNP is always larger because it adds exports
- GDP and GNP are equal because there is no foreign factor income (Correct answer)
- GDP is larger because it includes government spending
- GNP is zero because there are no foreign residents
Correct answer: GDP and GNP are equal because there is no foreign factor income
With no cross-border factor income flows, NFIA equals zero, making GDP and GNP identical.
Question 7: From a policy perspective, GDP is often preferred over GNP for measuring domestic economic capacity because:
- GDP is always larger and thus more politically favorable
- GDP captures all production occurring within borders, reflecting domestic jobs and infrastructure use (Correct answer)
- GNP counts government transfer payments twice
- GDP automatically adjusts for inflation while GNP does not
Correct answer: GDP captures all production occurring within borders, reflecting domestic jobs and infrastructure use
GDP measures total output within a country's borders, directly reflecting domestic employment, investment, and production capacity.
GDP Vs. GNP 3
In the late 1980s, the U.S. switched from using GNP to GDP as its primary national accounts measure.
What was the main reason?