Question

Which of the following is the correct relationship between Gross Domestic product (GDP), Gross National Product (GNP), Net Income Receipt (X), and Net Outflow to the foreign Assets (Y)?

• A. $\text{GNP} = \text{GDP} - \text{X} + \text{Y}$
• B. $\text{GNP} = \text{GDP} + \text{X} - \text{Y}$
• C. $\text{GDP} - \text{X} = \text{GNP} + \text{Y}$
• D. $\text{GDP} + \text{Y} = \text{GNP} - \text{X}$

Hint:

National Accounting Identity:
$\text{GNP} = \text{GDP} + \text{NFIA}$
where $\text{NFIA} = \text{Income Receipts from Abroad } (X) - \text{Income Payments to Abroad } (Y)$.
Therefore, $\text{GNP} = \text{GDP} + X - Y$.

Answer 1

The Correct Option is B

Concept:
National income accounting distinguishes between geographic production boundaries (Gross Domestic Product) and citizenship/ownership production boundaries (Gross National Product).
The mathematical bridge linking domestic production to national output is Net Factor Income from Abroad (NFIA).

Step 1: Defining GDP and GNP:
- Gross Domestic Product (GDP): The total monetary value of all finished goods and services produced within the geographic boundaries of a nation during a specified financial year.
- Gross National Product (GNP): The total monetary value of all finished goods and services produced by the normal residents and factors of production belonging to a nation, regardless of geographic location.

Step 2: Mathematical Integration of Foreign Factor Flows:
The transition from GDP to GNP requires adjusting for cross-border income flows:
\[ \text{GNP} = \text{GDP} + \text{Net Factor Income from Abroad (NFIA)} \] Let:
- $X$ = Factor income earned by domestic citizens from foreign assets abroad (receipts).
- $Y$ = Factor income earned by foreign nationals from domestic assets within the country (outflows/payments).
The Net Factor Income from Abroad is the net difference between inflows and outflows:
\[ \text{NFIA} = X - Y \] Substituting this expression into the primary national income equation:
\[ \text{GNP} = \text{GDP} + X - Y \]

Step 3: Verification of Balance Equation:
Re-arranging the algebraic terms:
\[ \text{GNP} = \text{GDP} + X - Y \] This identity reflects the economic accounting formula relating GDP, GNP, factor receipts, and factor payments.
Final Answer:
The correct relationship is $\text{GNP} = \text{GDP} + \text{X} - \text{Y}$, corresponding to option (B).