GNI is a comprehensive measure of the sum of the monetary value of all goods and services produced by residents in a country, possibly abroad. This means that GNI measures the total of the income generated by the citizens of a given nation, either resident or not within the country’s borders, but not by foreign citizens residing there. This is much broader than the concept of GDP, where income flows are cross-border, thus the measure is better than the one for the nation’s economic standing about the global economy.
What is Gross National Income?
Gross National Income (GNI) adds gross domestic product by the country to net income coming from abroad, for example, through remittances, interests, and profits acquired by nationals working abroad or investing abroad. The GNI is a reflection of a country’s domestic as well as residents’ income earned from abroad. Since GNI considers the income garnered by the nationals in foreign undertakings, this measures the economic progress of a country. However, GDP only covers the values of goods and services produced within the borders of a country.
Key Components of GNI
- Domestic Production (GDP): The total market value of goods and services produced within a country.
- Net Foreign Income: The income earned by residents working or investing abroad, minus the income earned by foreign residents within the country.
How Is GNI Calculated?
The calculation of GNI involves adding the gross domestic product (GDP) and net income from abroad. The formula is:
This formula highlights how GNI adjusts GDP by including cross-border income flows. Here’s a breakdown:
- Gross Domestic Product (GDP): This is the total of goods and services produced in the country.
- Net income from abroad: This is the foreign income received by residents, while income earned by foreigners in the country is excluded.
For example, if a country’s GDP is $1 trillion, and its net income from abroad is $50 billion, the GNI would be:
GNI = $1 trillion + $50billion = $1.05 trillion
When Is GNI Useful?
GNI is quite useful in understanding the actual level of income and economic activity of the residents of a country. Hence, GNI is quite an important tool for policymakers, economists, and international organizations such as the World Bank. Some key uses are:
- International Comparisons: GNI allows for better-balanced inter-country comparisons because it takes into account international income flows. This is more relevant when comparing developing economies since remittances to the country represent a large share of national income.
- Economic Planning and Policy: Governments and financial institutions can use GNI to compare the economic strength of their respective nation and formulate policies that can lift residents’ income, foreign ventures, as well as investments.
- Living Standards Assessment: Since GNI includes domestic as well as international income, GNI gives an exact idea of the average income of the residents and their purchasing capacity.
- Eligibility for Development Aid: In classifying countries into groups such as low-income groups, middle-income groups, and high-income groups, organizations like the World Bank use GNI per capita in determining a country’s eligibility for concessional financing or aid.
Gross National Income vs. Gross National Product
While GNI and GNP are often considered equivalent in many aspects, there are other subtle differences between these two measures. Both represent the economic performance of a nation with a slightly different focus.
Differences Between GNI and GNP
| GNI | GNP |
|---|---|
| Measures total income earned by residents, including those working abroad, but excludes income earned by foreigners within the country. | Focuses on the value of goods and services produced by the nationals of a country, regardless of where they are produced (inside or outside the country). |
| Includes net income from abroad (profits, wages, remittances). | Measures the output of goods and services by residents regardless of geographical location. |
While GNI and GNP are measures of economic activity in a country, GNI is more relevant to use as a measure when trying to assess the income actually benefiting the residents, whereas GNP is a measure of production.
GNI in Developing and Developed Countries
Large inflows of remittances from nationals who are working abroad mean that for developing countries GNI can be radically different from GDP. Remittances form a large portion of the GNI and give a better indication of the national income than it does when represented by GDP alone.
In developed countries, the divide is a lot less dramatic, though GNI and GDP still matter for countries with significant overseas investments or corporations earning profits elsewhere.
Conclusion
Gross National Income is the comprehensive expression of a country’s economic strength since it incorporates domestic and foreign income. In many ways, GNI acts as an essential measure for international comparisons in formulating the national economy’s policy and understanding the level of income across the nation. Comparing GNI with GDP will help governments and international organizations make better decisions about development policies, resource allocation, and other forms of aid.
Gross National Income FAQs
What is the difference between GDP and GNI?
Gross National Income (GNI) includes the total value of goods and services produced domestically (GDP) plus net income from abroad, whereas GDP focuses only on domestic production.
How does GNI help in economic policy?
GNI provides a broader view of the nation’s total income, helping policymakers design better economic policies, especially in understanding the contributions of citizens working abroad.
Is GNI a good measure for developing countries?
Yes, GNI is particularly useful for developing countries where remittances and income from abroad play a crucial role in the economy.
How is GNI calculated?
GNI is calculated by adding a country’s GDP and net income from abroad (i.e., the difference between income earned by residents abroad and income earned by foreigners domestically).
Why is GNI used for international comparisons?
GNI accounts for the income earned from international sources, offering a more accurate measure of residents’ actual income compared to GDP. This is useful for comparing living standards and economic performance across countries.
