GDP Vs. GNP 5 — Questions and Answers
Question 1: Historical U.S. data shows GDP and GNP are very close in value. This suggests that for the U.S.:
- The U.S. has no foreign trade
- Income earned abroad by Americans roughly equals income earned in the U.S. by foreigners (Correct answer)
- U.S. GDP is understated by the BEA
- GNP methodology does not apply to large economies
Correct answer: Income earned abroad by Americans roughly equals income earned in the U.S. by foreigners
When GDP ≈ GNP, net factor income from abroad is near zero, meaning outflows and inflows of factor income are roughly balanced.
Question 2: Which international organization primarily uses GNI (the modern equivalent of GNP) to classify countries by income level?
- International Monetary Fund (IMF)
- World Trade Organization (WTO)
- World Bank (Correct answer)
- United Nations Development Programme (UNDP)
Correct answer: World Bank
The World Bank uses GNI per capita to categorize countries as low-, middle-, or high-income economies.
Question 3: A country's GDP grows 4% while its GNP grows only 1%. Which of the following could explain this divergence?
- The country sharply increased domestic government spending
- Foreign investors increased profit repatriation from their domestic operations (Correct answer)
- The country experienced strong export growth
- Domestic consumers increased savings rates
Correct answer: Foreign investors increased profit repatriation from their domestic operations
Rising repatriation of profits by foreign investors increases income counted in foreign GNPs but not the host country's GNP, widening the GDP-GNP gap.
Question 4: Real GDP adjusts nominal GDP for price changes. Does the same logic apply to GNP?
- No, GNP is always reported in nominal terms only
- Yes, both GDP and GNP can be expressed in real or nominal terms using a price deflator (Correct answer)
- Only GNP can be real; GDP is always nominal
- Real adjustments apply only to per-capita figures
Correct answer: Yes, both GDP and GNP can be expressed in real or nominal terms using a price deflator
Both GDP and GNP can be deflated by a price index to produce real values, enabling comparisons across time periods.
Question 5: Which of the following transactions increases a country's GDP but decreases its GNP (relative to GDP)?
- A domestic firm exports goods to another country
- A foreign-owned company produces goods domestically and repatriates the profits (Correct answer)
- A resident earns dividends from a foreign stock
- The government increases infrastructure spending
Correct answer: A foreign-owned company produces goods domestically and repatriates the profits
Foreign-owned production boosts GDP (domestic output), but repatriated profits reduce net factor income from abroad, lowering GNP relative to GDP.
Question 6: From a long-run growth perspective, why might policymakers in a heavily foreign-invested country monitor GNP growth more carefully than GDP growth?
- GNP is a better inflation indicator than GDP
- GNP reveals how much of the growth actually benefits domestic residents vs. foreign owners (Correct answer)
- GDP double-counts foreign investment flows
- GNP includes government transfer payments that GDP excludes
Correct answer: GNP reveals how much of the growth actually benefits domestic residents vs. foreign owners
Rapid GDP growth driven by foreign investment may not improve domestic living standards if profits are repatriated; GNP captures only the resident income share.
Question 7: Which of the following pairs correctly matches the measure to what it emphasizes?
- GDP = resident income; GNP = geographic output
- GDP = geographic output; GNP = resident income (Correct answer)
- GDP = nominal output; GNP = real output
- GDP = private sector; GNP = public sector output
Correct answer: GDP = geographic output; GNP = resident income
GDP emphasizes production within borders (geographic output) while GNP emphasizes income earned by a nation's residents (resident income), regardless of location.
GDP Vs. GNP 5
Historical U.S. data shows GDP and GNP are very close in value.
This suggests that for the U.S.: