The difference between GDP and GNP

Analyze the question: The question asks what accounts for the difference between GDP (Gross Domestic Product) and GNP (Gross National Product).

Explain the concept:

• GDP measures the total value of goods and services produced within the geographical boundaries of a country, regardless of who owns the factors of production. A Nigerian-based factory owned by a foreign company counts in Nigeria's GDP.
• GNP measures the total value of goods and services produced by a country's citizens and firms, wherever they are in the world.

Step-by-step solution:

The relationship is:

GNP = GDP + Net Factor Income from Abroad (NFIA)

where

NFIA = Income earned by citizens abroad − Income earned by foreigners within the country

For example, profits sent home by a foreign oil company operating in Nigeria are subtracted from Nigeria's GNP. Remittances and earnings of Nigerians working or investing abroad are added.

Checking the options:

• A. Consumption of fixed capital is depreciation. It is the difference between gross and net measures (e.g., GDP and NDP), not between GDP and GNP.
• B. Indirect business tax is the difference between factor cost and market price valuation.
• C. Net factor income from abroad is the correct answer, as shown in the formula above.
• D. Public transfer payment (e.g., pensions, subsidies) is not included in national income because it is not payment for production.

Answer: C. Net factor income from abroad

Exam tip: Remember "GNP = GDP + NFIA". Think: Domestic = location (inside the borders), National = nationality (citizens). Also, "Gross vs Net" always relates to depreciation (consumption of fixed capital), while "Domestic vs National" relates to income from abroad.