GDP Vs. GNP 4 — Questions and Answers
Question 1: Which of the following would be included in a country's GNP but NOT in its GDP?
- Output of a foreign-owned factory inside the country
- Wages earned by the country's citizens working in foreign countries (Correct answer)
- Government purchases of domestic goods
- Consumer spending on imported goods
Correct answer: Wages earned by the country's citizens working in foreign countries
Wages earned by citizens abroad are part of national income (GNP) but not domestic production (GDP).
Question 2: How does the treatment of a foreign tourist's hotel spending differ between GDP and GNP calculations for the host country?
- It enters GDP as an export but is excluded from GNP
- It is included in GDP (domestic production) but not directly in GNP (Correct answer)
- It raises GNP through increased national income but not GDP
- It is excluded from both because tourists are not residents
Correct answer: It is included in GDP (domestic production) but not directly in GNP
The hotel service is produced within the host country's borders, so it enters GDP, but since the tourist is not a resident, no GNP adjustment occurs.
Question 3: If GDP grows but GNP stays flat, a likely explanation is:
- Domestic investment fell sharply
- An increase in foreign-owned firms' profits being repatriated abroad (Correct answer)
- Government deficit spending increased
- Consumer confidence declined
Correct answer: An increase in foreign-owned firms' profits being repatriated abroad
Growing GDP with flat GNP suggests more of the domestic output's income is flowing to foreign owners rather than domestic residents.
Question 4: The term 'factor income' in the GDP-GNP relationship refers to:
- Taxes collected by the government on production
- Payments to factors of production such as wages, rent, interest, and profit (Correct answer)
- Subsidies paid to domestic industries
- Transfer payments like Social Security
Correct answer: Payments to factors of production such as wages, rent, interest, and profit
Factor income includes wages, rent, interest, and profit — the earnings of labor and capital used in production.
Question 5: Mexico has many workers employed in the U.S. whose wages flow back to Mexico. This makes Mexico's GNP relative to GDP:
- Lower, because emigrants reduce Mexico's labor force
- Higher, because those wages are counted in Mexico's GNP (Correct answer)
- Equal, because cross-border flows cancel out
- Lower, because the wages are counted in U.S. GNP instead
Correct answer: Higher, because those wages are counted in Mexico's GNP
Wages earned by Mexican nationals in the U.S. add to Mexico's GNP (factor income from abroad) but not its GDP.
Question 6: An economist calculates GDP = $1 trillion, income received from abroad = $80B, and income sent abroad = $50B. What is GNP?
- $970 billion
- $1.03 trillion (Correct answer)
- $1.13 trillion
- $950 billion
Correct answer: $1.03 trillion
GNP = GDP + (income received − income sent) = $1,000B + $80B − $50B = $1,030B = $1.03 trillion.
Question 7: Which measure would be most appropriate for comparing how much income residents of two countries have available to spend?
- GDP per capita of each country
- GNP (or GNI) per capita of each country (Correct answer)
- Trade surplus of each country
- Gross fixed capital formation of each country
Correct answer: GNP (or GNI) per capita of each country
GNP/GNI per capita captures income earned by residents regardless of where production occurs, best reflecting spending power.
GDP Vs. GNP 4
Which of the following would be included in a country's GNP but NOT in its GDP?