GNI also includes any product taxes not already counted, minus subsidies. It only counts income earned from residents who work abroad and does not count income earned by foreigners located in the country. Like GDP, it also does not include the shadow or black economy. While GNI can be used for a few purposes, it is mostly used to classify and group economies using purchasing power parity and the per capita method to determine different countries’ standard of living to each other.
Difference Between GNI and GDP
Gross domestic product measures the value of goods and services produced within a country; the measurement includes national output, expenditures, and income. GNI equals GDP plus wages, salaries, and property income of the country’s residents earned abroad and at home. It also includes net taxes and subsidies receivable from abroad, according to the Organization for Economic Cooperation and Development.
Difference Between GNI and GNP
Gross national product includes the earnings from all assets owned by residents. It even includes earnings that don’t flow back into the country. It then omits the earnings of all foreigners living in the country, even if they spend it within the country. GNP only reports how much is earned by the country’s citizens and businesses, no matter where it is spent in the world. The chart provides a visual of what is and isn’t included in GDP, GNI, and GNP. The components of GDP are:
Personal consumption (C)Business investment (I)Government spending (G)Exports - imports (X)
GDP is calculated as: GNI uses GDP and two different types of income circumstances:
Income from citizens and businesses earned abroad (A)Income remitted by foreigners living in the country back to their home countries (B)
This gives the formula: To calculate GNP, GDP is used again, with two types of income that are different from those used to calculate GNI:
Income earned on all foreign assets (C)Income earned by foreigners in the country (D)
The formula then becomes:
Why These Differences Are Important
In many emerging markets, such as Mexico, residents move to other countries where they can earn a better living. Many workers that do this send money back to their families in their home county. There is enough of this type of income that it influences economic metrics. It’s counted in GNI and GNP but not in GDP. As a result, comparisons of GDP by country will understate the size of these countries’ economies because of the missing financial data (known as worker’s remittances)—remittances count for close to 6% of lower-income countries’ GDP.
GNI as a Comparison Tool
The World Bank provides GNI data for all countries. To compare incomes among nations, it removes the effects of currency exchange rates by converting everything to the U.S. dollar using purchasing power parity (PPP). The problem with the PPP method, though, is that it converts all goods and services in a country to what it would cost in the United States. The method works well for products like McDonald’s hamburgers that are sold across the world—but does a poor job of estimating the value of goods not sold in America. GNI per capita is a measurement of income to the number of people in the country. It compares the GNI of countries with different population sizes and standards of living. However, GNI does not account for costs of living or subsistence levels—which means that while providing good information about the income levels of the people in a country, it should be used in context with other measurements to grasp a full picture of the income and purchasing power a country’s citizens have.
