Key Takeaways
- GNI measures income by residents, regardless of location.
- GNI = GDP plus net income from abroad.
- GNI differs from GDP in foreign income treatment.
- GNI per capita shows average income per person.
What is Gross National Income (GNI)?
Gross National Income (GNI) measures the total income earned by a country's residents and businesses, regardless of where that income is generated globally. Unlike Gross Domestic Product (GDP), which focuses on location of production, GNI accounts for income flows across borders, capturing earnings from foreign investments and remittances.
This distinction ties into the broader factor market concept, where income is derived from ownership of production factors like labor and capital, whether domestic or abroad.
Key Characteristics
Understanding GNI involves several key features that differentiate it from related economic measures:
- Global income scope: GNI includes all income earned by residents and companies worldwide, making it a broader measure than GDP.
- Net income from abroad: It adds income received from foreign sources minus income paid to non-residents, reflecting cross-border earnings.
- Relation to GDP: GNI equals GDP plus net incomes from abroad, highlighting the impact of international economic activity.
- Used for economic comparisons: GNI per capita helps compare income levels across countries, factoring in population differences and purchasing power.
- Historical basis: The economic theories of David Ricardo underpin the understanding of income flows related to production factors.
How It Works
To calculate GNI, start with GDP, which measures domestic production value. Then, add net factor incomes from abroad, such as wages and investment returns earned by residents overseas, and subtract similar payments made to foreign residents within the country.
This process reflects the movement of earnings through the capital account in balance of payments accounting, capturing income related to ownership rather than location. The World Bank's Atlas method further refines GNI calculations by smoothing exchange rate and inflation differences for more accurate international comparisons.
Examples and Use Cases
GNI is particularly relevant for countries and companies engaged in significant international operations:
- Multinational corporations: For example, Delta earns income both domestically and abroad, affecting the United States' GNI figures as foreign profits are included.
- Comparing economic health: Countries like Ireland adjust GDP to GNI to better reflect the income actually accruing to residents, due to large foreign corporate presence.
- Investment decisions: Investors interested in best growth stocks might consider GNI trends to assess the income environment affecting multinational companies.
Important Considerations
While GNI provides a comprehensive view of income, it does not account for depreciation, which is considered in Net National Income. Additionally, variations in capital flows can cause significant differences between GDP and GNI, especially in highly globalized economies.
When analyzing GNI, consider how international earnings influence a country's economic health and the implications for policy and investment, particularly in sectors linked to foreign operations or remittances.
Final Words
Gross National Income (GNI) provides a clearer picture of a country's income by including earnings from abroad, unlike GDP. To assess economic health or compare nations, consider examining GNI alongside GDP for a fuller understanding of income flows.
Frequently Asked Questions
Gross National Income (GNI) is the total amount of factor incomes earned by a country's residents and companies, regardless of where that income is generated globally. It measures the income based on ownership and residence, unlike GDP which measures production within geographical borders.
GDP measures the value of all goods and services produced within a country's borders, while GNI measures the total income earned by residents and companies of a country, no matter where they operate. For example, profits from a foreign factory owned by a country's company count toward that country's GNI but not its GDP.
GNI is calculated by adding net incomes from abroad to the GDP. This means starting with GDP, adding factor incomes received by residents from non-residents, and subtracting factor incomes paid by residents to non-residents, along with adjustments for taxes and subsidies.
GNI per capita is the total GNI divided by a country's population, providing an average income figure per person. It helps assess economic growth and living standards, especially when adjusted for inflation and purchasing power parity for better international comparisons.
If a U.S. company earns profits from operations in Germany, those profits are added to U.S. GNI but don’t affect U.S. GDP. Conversely, if a German company earns profits from a factory in the U.S., that amount is included in U.S. GDP but subtracted from U.S. GNI.
The Atlas method smooths out fluctuations in prices and exchange rates by averaging the exchange rate over three years and adjusting for inflation differences between countries. This helps provide a more stable and comparable measure of GNI across countries.
Net National Income (NNI) is derived from GNI by subtracting depreciation, reflecting the net income available to a country after accounting for the loss in value of assets over time.
