What Is Gross National Income (GNI)?
Gross National Income (GNI) represents the total income earned by a country's residents and businesses, regardless of where that income is generated. As a key metric in National Income Accounting, GNI offers a comprehensive view of a nation's economic strength by encompassing income from both domestic and international sources. It is a fundamental economic indicator used in macroeconomics to assess the overall income available to a country's population. GNI includes all income earned by residents, such as wages, salaries, profits, interest, and rent, whether these earnings come from activities within the country's borders or from abroad.
History and Origin
The concept of measuring national income gained prominence in the early 20th century, particularly during the Great Depression, when policymakers needed better data to understand economic activity and formulate responses. The modern framework for national accounts, including what is now GNI, largely evolved from the work of economists like Simon Kuznets, who developed the initial concepts of gross national product (GNP) for the U.S. Congress in the 1930s. The U.S. Department of Commerce began issuing national income statistics in 1934 to gauge the economic impact of the depression, followed by GNP statistics in 1942 to assess war production feasibility.7
Historically, many countries, including the United States and the United Kingdom, initially favored the Gross National Product (GNP) as a primary measure of economic activity. GNP was broadly similar to GNI, focusing on the income of residents. However, with revisions to international accounting standards, particularly the 1993 System of National Accounts (SNA), the term GNP was largely replaced by GNI to more explicitly reflect its nature as an income concept rather than solely a production measure. This shift clarified that the metric primarily accounts for the income flowing to a nation's residents.
Key Takeaways
- Comprehensive Income Measure: GNI accounts for all income earned by a country's residents and businesses, whether domestically or abroad.
- Reflects Economic Well-being: It provides insight into the total income available to a nation's population, influencing their standard of living.
- International Comparisons: GNI per capita is often used by international organizations like the World Bank to classify countries by income levels.
- Distinction from GDP: Unlike Gross Domestic Product (GDP), GNI includes net income from abroad, making it a broader measure of national income.
- Policy Tool: Governments and international bodies use GNI data for economic planning, aid allocation, and assessing global economic growth.
Formula and Calculation
The formula for Gross National Income (GNI) is derived from Gross Domestic Product (GDP) by adjusting for net income received from abroad.
The formula can be expressed as:
Where:
- GDP (Gross Domestic Product): The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
- Net Income from Abroad: This component includes two main elements:
- Income receipts from abroad: Income earned by a country's residents from investments and labor services provided outside its borders, such as dividends, interest, rent, and wages.
- Income payments to abroad: Income paid to non-residents for their contributions to the domestic economy.
Alternatively, some definitions detail the net income from abroad more granularly, as seen in the OECD definition:
\text{GNI} = \text{GDP} + \text{Net receipts from abroad of compensation of employees} + \text{Property income} + \text{Net taxes less subsidies on production} $$[^6^](https://www.oecd.org/en/data/indicators/gross-national-income.html) This expanded view clarifies the specific types of [international trade](https://diversification.com/term/international-trade) and financial flows that contribute to the net income adjustment. ## Interpreting the GNI Gross National Income (GNI) serves as a vital metric for understanding the economic strength and development level of a nation. When interpreting GNI, it's crucial to consider its per capita value, which is obtained by dividing the total GNI by the country's mid-year population. This Purchasing Power Parity (PPP) adjusted GNI per capita is commonly used to classify countries into income groups (low, lower-middle, upper-middle, and high-income) by organizations like the World Bank.[^5^](https://www.visualcapitalist.com/global-income-level-classification-by-country-gni/) A rising GNI suggests an expanding economy and, generally, an improving standard of living for its residents, assuming the population growth rate does not outpace income growth. High GNI relative to GDP can indicate significant income streams from overseas investments or substantial [remittances](https://diversification.com/term/remittances) from citizens working abroad. Conversely, if a country's GNI is significantly lower than its GDP, it suggests that a considerable portion of the income generated domestically is flowing to non-residents, often through [foreign direct investment](https://diversification.com/term/foreign-direct-investment) (FDI) outflows. ## Hypothetical Example Consider a hypothetical country, "Diversifica," with the following economic data for a given year: * **Gross Domestic Product (GDP):** $1,000 billion * **Income received by Diversifica's residents from abroad:** $100 billion (e.g., profits from Diversifica-owned companies operating overseas, wages earned by Diversifica citizens working abroad). * **Income paid by Diversifica to non-residents:** $40 billion (e.g., profits repatriated by foreign companies operating in Diversifica, wages paid to foreign workers). To calculate Diversifica's GNI, we apply the formula: Net Income from Abroad = Income received from abroad - Income paid to abroad Net Income from Abroad = $100 billion - $40 billion = $60 billion GNI = GDP + Net Income from Abroad GNI = $1,000 billion + $60 billion = $1,060 billion In this scenario, Diversifica's GNI of $1,060 billion indicates that its residents and businesses collectively earned $60 billion more from international activities than they paid out, showcasing a net inflow of income from the global economy. This figure offers a more complete picture of the nation's total income than GDP alone, highlighting the impact of its engagement in [global markets](https://diversification.com/term/global-markets). ## Practical Applications Gross National Income (GNI) is a versatile economic metric with several practical applications across various sectors: * **International Development and Aid:** GNI per capita is a primary criterion used by organizations like the World Bank to classify countries into income groups, which in turn influences eligibility for development assistance and loans. This classification helps target resources to countries with greater needs.[^4^](https://www.visualcapitalist.com/global-income-level-classification-by-country-gni/) * **Economic Analysis and Forecasting:** Analysts use GNI to assess a country's overall economic health and potential for [economic growth](https://diversification.com/term/economic-growth). It provides a broader perspective than GDP by including cross-border income flows, which can be particularly relevant for economies with significant expatriate populations or extensive international investments. Data on GNI, such as that provided by the St. Louis Federal Reserve for OECD members, is a valuable resource for economists.[^3^](https://fred.stlouisfed.org/series/NYGNPMKTPCDOED) * **Investment Decisions:** Investors evaluating foreign markets consider GNI alongside other economic indicators to understand the total income streams available to a nation. A robust GNI can signal a stable economic environment with potential for consumer spending and business expansion, influencing decisions on [portfolio allocation](https://diversification.com/term/portfolio-allocation) and [capital flows](https://diversification.com/term/capital-flows). * **Government Policy and Budgeting:** Governments use GNI data for national budgeting, tax revenue projections, and assessing their capacity for public services and debt repayment. Understanding the full scope of national income helps in planning fiscal policy. * **European Union Contributions:** GNI forms the basis for calculating a significant portion of member nations' contributions to the European Union budget. ## Limitations and Criticisms While Gross National Income (GNI) offers a comprehensive view of a nation's income, it has certain limitations and faces criticisms as a sole measure of economic well-being: * **Distribution of Income:** GNI is an aggregate measure and does not reflect how income is distributed among a country's population. A high GNI could still mask significant income inequality, where a small percentage of the population earns a large share of the total income, while many live in poverty. This limitation means GNI alone cannot fully represent the [economic welfare](https://diversification.com/term/economic-welfare) of a country's citizens. * **Non-Market Activities:** Like GDP, GNI typically does not account for non-market economic activities, such as unpaid household work, volunteer services, or informal sector activities. These activities contribute to overall welfare but are not captured in monetary transactions. * **Environmental Costs:** GNI does not explicitly factor in environmental [externalities](https://diversification.com/term/externalities) or the depletion of natural resources. Economic activities that boost GNI might come at the cost of environmental degradation, which is not reflected in the income figure. * **Quality of Life:** GNI is a quantitative measure of income and does not inherently reflect qualitative aspects of life such as health, education, leisure time, political freedom, or social equity. These factors significantly contribute to the overall [quality of life](https://diversification.com/term/quality-of-life) but are not directly measured by GNI. * **Currency Fluctuations:** When comparing GNI across countries, particularly when converted to a common currency like the U.S. dollar, fluctuating [exchange rates](https://diversification.com/term/exchange-rates) can distort comparisons. While methods like the World Bank Atlas method or PPP adjustments aim to mitigate this, they are not perfect.[^2^](https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQGcy-4f2pLs8Rh8XJCFUkDEo9iPvlpLlv9TDQY-IVkfcSYxqAAwG-9coaeobaJZ2Cx1_-I21Vf0OsQGnGCz6RQrFzP4aqeYBzStijJmRFYRhTj24sVashKm2oiL8dW6iPEeYSOGNW6wxTJKIePtNA==) ## GNI vs. GDP Gross National Income (GNI) and Gross Domestic Product (GDP) are both crucial measures in [economic accounting](https://diversification.com/term/economic-accounting), but they differ in their focus regarding geographic boundaries versus residency. | Feature | Gross National Income (GNI) | Gross Domestic Product (GDP) | | :------------ | :------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Focus** | Income earned by a country's **residents** and businesses, regardless of where the income is generated. | Value of all finished goods and services **produced within a country's borders**, regardless of who owns the production factors. | | **Inclusion** | Includes income from abroad (e.g., profits from overseas investments, remittances from citizens working in other countries). | Excludes income from abroad, but includes income earned domestically by foreign entities. | | **Perspective** | "Who earns the money?" (Income perspective for residents). | "Where is the money earned?" (Production perspective within a territory). | | **Formula** | GNI = GDP + Net Income from Abroad | GDP = Consumption + Investment + Government Spending + [Net Exports](https://diversification.com/term/net-exports) | The primary point of confusion often arises because both metrics aim to measure economic output. However, GDP focuses on the *location* of production, while GNI focuses on the *residency* of the income earners. For instance, if a U.S. company operates a factory in Mexico, the production from that factory contributes to Mexico's GDP. However, the profits repatriated by the U.S. company from that factory contribute to the U.S. GNI, not its GDP. Similarly, wages earned by a foreign national working in the U.S. contribute to U.S. GDP, but those wages, if sent home as remittances, contribute to their home country's GNI. The United States switched from using GNP (the precursor to GNI) to GDP as its primary measure of production in 1991. ## FAQs ### What is the main difference between GNI and GDP? The main difference lies in what they measure: Gross Domestic Product (GDP) measures the economic output *within a country's borders*, while Gross National Income (GNI) measures the total income earned by a country's *residents*, regardless of where that income originated. GNI adds net income received from abroad to GDP. ### Why is GNI important? GNI is important because it provides a more complete picture of a nation's economic strength and the total income available to its citizens. It considers global economic engagement, including [foreign direct investment](https://diversification.com/term/foreign-direct-investment) and [remittances](https://diversification.com/term/remittances), which are significant for many economies. It's often used by international bodies to assess development levels and allocate aid. ### Does a higher GNI always mean a better standard of living? A higher GNI generally correlates with a better standard of living, as it indicates more income available to residents. However, GNI is an aggregate measure and does not account for income distribution, [inflation](https://diversification.com/term/inflation), or other non-monetary factors like public services, environmental quality, or social equality. Therefore, it's not a perfect measure of welfare on its own. ### How does GNI relate to national wealth? GNI is a flow measure of income over a period, typically a year. [National wealth](https://diversification.com/term/national-wealth), on the other hand, is a stock measure of a nation's total assets (minus liabilities) at a specific point in time. While a higher GNI can contribute to an increase in national wealth over time through savings and [investment](https://diversification.com/term/investment), they are distinct concepts. ### Who calculates GNI? National statistical agencies, like the U.S. [Bureau of Economic Analysis](https://diversification.com/term/bureau-of-economic-analysis) (BEA)[^1^](https://www.bea.gov/help/glossary/gross-national-income-gni), and international organizations such as the World Bank and the Organisation for Economic Co-operation and Development (OECD), compile and publish GNI data for countries worldwide based on international accounting standards.