Which of the following statements is correct concerning GDP and GNP?
A. GDP measures output within the nation’s borders only.
B. GNP measures output within the nation’s borders only.
C. GDP measures output produced by a nation’s factors even if they are outside the nation’s borders.
D. GNP measures output outside a nation’s borders, but not inside it.
The correct answer and explanation is :
The correct answer is:
A. GDP measures output within the nation’s borders only.
Explanation:
To understand the difference between Gross Domestic Product (GDP) and Gross National Product (GNP), it’s crucial to recognize how each metric measures economic activity.
- Gross Domestic Product (GDP):
- GDP refers to the total market value of all goods and services produced within a country’s borders, regardless of who owns the production assets.
- This means that GDP accounts for the output generated by both domestic and foreign factors of production, but only within the geographical boundaries of the country.
- For example, if a foreign company operates a factory in the country, the value of goods produced in that factory would be included in the country’s GDP. However, the income generated by foreign workers or capital would not be counted in the GDP if it is repatriated outside the country’s borders.
- Gross National Product (GNP):
- GNP measures the total market value of all goods and services produced by the residents of a country, regardless of whether that production takes place within the country’s borders or abroad.
- This means that GNP includes the income earned by a country’s residents from overseas investments and subtracts the income earned by foreign residents from production within the country’s borders.
- For instance, if a U.S. company operates a factory in another country and profits are sent back to the U.S., this would count toward the U.S.’s GNP, even though the production took place abroad.
Why the other options are incorrect:
- B. GNP is not limited to output produced within the nation’s borders. It includes production by the nation’s residents anywhere in the world, not just inside the borders.
- C. This describes GNP, not GDP. GDP only measures output within the nation’s borders and does not consider where the factors of production (labor, capital) are located.
- D. GNP is concerned with output produced by a nation’s residents, whether within or outside its borders. It does not exclusively measure output outside the country.
Thus, A is the correct answer because GDP specifically focuses on domestic production within the borders of a country.