Gross_national_income

What Is Gross National Income?

Gross National Income (GNI) is the total income earned by a country's residents and businesses, both domestically and abroad, over a specific period, typically a year. As a key metric in macroeconomics, GNI provides a comprehensive view of a nation's economic activity by including income from foreign sources. It is often used to assess the overall health and performance of an economy, offering an alternative perspective to measures like Gross Domestic Product (GDP). GNI considers income earned by a nation's residents, regardless of where that income is generated.⁴⁰

History and Origin

The concept of national income accounting, which includes measures like GNI, has evolved significantly over time. The modern framework for Gross National Product (GNP), the precursor to GNI, was initially developed by Simon Kuznets for a U.S. Congress report in 1934. While some countries, including the U.S. and the U.K., initially favored GNP, others, such as Norway, preferred GDP.

Over time, international communication harmonized around GDP, and the U.S. officially switched to using GDP as its primary economic indicator in 1991. However, the importance of GNI remained, particularly as global economic interconnections deepened. The System of National Accounts (SNA), which provides the international standard for measuring economic activity, has undergone several revisions, with the 1993 SNA being a joint publication of the United Nations, the Organisation for Economic Co-operation and Development (OECD), and the International Monetary Fund (IMF).³⁹ These revisions continually refine how countries measure and report their national income, including GNI, to better reflect global economic realities.³⁸

Key Takeaways

• Gross National Income (GNI) represents the total income earned by a country's residents and businesses, including income from abroad.
• It serves as a vital indicator in economic analysis for understanding a nation's overall wealth.
• GNI accounts for income generated both within a country's borders and from foreign investments or remittances.³⁷
• International organizations like the World Bank utilize GNI to classify countries by income levels, which in turn influences access to development aid.³⁶
• While a robust measure, GNI has limitations, such as not fully reflecting income distribution or non-monetary factors.³⁵

Formula and Calculation

The formula for calculating Gross National Income starts with Gross Domestic Product (GDP) and adjusts for net income received from abroad.

The formula for GNI is:

$\text{GNI} = \text{GDP} + \text{Net Income from Abroad}$

Where:

• GDP (Gross Domestic Product): The total monetary value of all finished goods and services produced within a country's geographical borders over a specified period.³⁴
• Net Income from Abroad: This includes income earned by residents from foreign investments, remittances (money sent home by individuals working abroad), and other sources of primary income received from the rest of the world, minus similar income paid to non-residents.³², ³³ This can include compensation of employees, property income, and net taxes less subsidies on production.³¹

For example, if a country's citizens own businesses overseas that repatriate profits, or if its citizens work in other countries and send money home, these inflows contribute to the "Net Income from Abroad" component, increasing GNI relative to GDP. Conversely, if foreign companies operating within a country send their profits back to their home countries, or if foreign workers send their earnings out of the country, this would reduce the "Net Income from Abroad" component.

Interpreting the Gross National Income

Interpreting GNI involves understanding what the figure represents and its implications for a country's economic standing. A higher GNI generally indicates a wealthier nation, as it reflects the total income accruing to its residents. It's particularly useful for countries with significant international economic engagement, such as those with large foreign investments or substantial remittances from citizens working abroad.³⁰

When comparing countries, GNI per capita—GNI divided by the total population—provides a more nuanced picture of the average income available to individuals. Thi²⁹s helps in assessing living standards, although it does not account for income inequality within a nation. Org²⁷, ²⁸anizations like the World Bank use GNI per capita to classify countries into different income groups (low, lower-middle, upper-middle, and high income), which in turn determines their eligibility for certain types of development assistance and financing.

Fu²⁶rthermore, changes in GNI over time can signal economic growth or contraction. An increasing GNI suggests that a nation's residents are collectively earning more, indicating a growing economy and potentially more resources for consumption, investment, and savings.

##²⁵# Hypothetical Example

Consider a fictional country, "DiverseLand," in a given year.

• DiverseLand's Gross Domestic Product (GDP) is determined to be $500 billion. This represents the value of all goods and services produced within its borders.
• DiverseLand's citizens and companies own significant assets abroad. They receive $30 billion in investment income, such as dividends from foreign companies and interest from overseas bonds.
• DiverseLand also has a large diaspora of workers sending home $20 billion in remittances.
• However, foreign companies operating in DiverseLand repatriate $15 billion in profits to their home countries.
• Foreign workers in DiverseLand send $5 billion in earnings back to their home countries.

To calculate DiverseLand's GNI:

1. Calculate Net Income from Abroad (NIFA):

   • Income received from abroad: $30 billion (investment income) + $20 billion (remittances) = $50 billion
   • Income paid abroad: $15 billion (repatriated profits) + $5 billion (foreign worker earnings) = $20 billion
   • Net Income from Abroad = $50 billion - $20 billion = $30 billion

2. Calculate GNI:

   • GNI = GDP + Net Income from Abroad
   • GNI = $500 billion + $30 billion = $530 billion

In this hypothetical example, DiverseLand's GNI of $530 billion is higher than its GDP of $500 billion, illustrating the impact of its substantial income inflows from abroad. This higher GNI provides a more complete picture of the total income available to DiverseLand's residents and can influence its international financial standing and classifications by global bodies.

Practical Applications

Gross National Income plays a crucial role in various real-world financial and economic applications:

• International Comparisons and Classifications: Global organizations, notably the World Bank, use GNI per capita to classify countries into different income categories (low, lower-middle, upper-middle, and high income). This classification is vital as it affects a country's access to development finance and concessional loans.
• ²⁴ Economic Policy and Planning: Policymakers utilize GNI data to inform decisions related to monetary policy and fiscal policy. For instance, a declining GNI might prompt governments to implement measures aimed at stimulating economic growth, such as tax cuts or increased government spending.
• ²³ Assessing Economic Welfare: While GNI doesn't capture all aspects of well-being, it is often considered a better indicator than GDP for the income actually available to a country's residents, particularly due to the inclusion of income from abroad.
• ²² Contributions to International Organizations: GNI serves as the basis for calculating a significant portion of contributions to the European Union's budget, demonstrating its importance in international financial frameworks.
• Investment Decisions: Investors and financial analysts consider GNI when evaluating the economic health and stability of a country for potential investments. It offers insights into the income-generating capacity of a nation's residents, which can influence perceptions of creditworthiness and market potential.

Limitations and Criticisms

While Gross National Income offers a valuable perspective on a country's economic standing, it is not without its limitations and has faced several criticisms:

• Income Distribution: A significant criticism is that GNI does not account for the distribution of income within a country. A h²¹igh GNI per capita might mask significant income inequality, where a small portion of the population holds a large share of the wealth, while many citizens may still live in poverty. Thi²⁰s can lead to an incomplete picture of overall societal well-being.
• Non-Monetary Factors: GNI primarily focuses on monetary transactions and does not incorporate non-monetary factors crucial for human development, such as access to healthcare, quality of education, or the value of unpaid work like household chores or volunteer activities.
• ¹⁸, ¹⁹ Environmental Impact: GNI does not inherently consider the environmental costs or benefits associated with economic activity. Eco¹⁷nomic growth measured by GNI might be achieved at the expense of environmental degradation, which can have long-term negative consequences for the economy and society.
• ¹⁶ Exchange Rate Fluctuations: When comparing GNI across countries, particularly when converted to a common currency like the U.S. dollar, fluctuations in exchange rates can distort the true picture of economic performance and purchasing power.
• ¹⁴, ¹⁵ Shadow Economies: Unrecorded economic activities, often referred to as "shadow economies" or "black markets," are not included in GNI calculations, which can lead to an underestimation of the true economic activity in some countries.
• ¹³ Depreciation: GNI is a "gross" measure, meaning it does not account for the depreciation of fixed capital assets (wear and tear on machinery, buildings, infrastructure). Sub¹²tracting depreciation yields Net National Income (NNI), which some argue provides a clearer measure of sustainable income.

##¹¹# Gross National Income vs. Gross Domestic Product

Gross National Income (GNI) and Gross Domestic Product (GDP) are both widely used economic indicators, but they differ fundamentally in what they measure. The key distinction lies in their geographical and ownership perspectives.

For many countries, the difference between GNI and GDP is not substantial. However, for nations that have considerable foreign direct investment, a significant foreign corporate presence, or receive substantial foreign aid, the difference between GNI and GDP can be considerable. For example, a country with many citizens working abroad sending remittances home might have a GNI higher than its GDP. Conversely, a country with many foreign-owned businesses that repatriate profits might have a GNI lower than its GDP. Both metrics are valuable, offering complementary insights into a nation's economic health and its position in the global economy.

FAQs

What is the primary difference between GNI and GDP?
GNI measures the total income earned by a country's residents, including income from abroad, while GDP measures the total value of goods and services produced within a country's borders.

⁶Why is GNI considered important?
GNI provides a more complete picture of a nation's overall wealth by accounting for income flows from outside its borders. This is especially relevant for countries with significant international investments or a large diaspora.

Does GNI account for income inequality?
No, GNI is an aggregate measure and does not provide information about how income is distributed among the population within a country. A high GNI can still exist alongside significant income disparities.

⁵How do international organizations use GNI?
Organizations like the World Bank use GNI per capita to classify countries into income groups, which helps determine eligibility for various forms of development assistance and loans.

⁴What are some limitations of GNI?
Key limitations of GNI include its inability to capture income distribution, non-monetary factors like unpaid work or access to social services, and environmental impacts of economic activity. It ², ³also can be affected by currency exchange rates, making international comparisons challenging.¹