Gross National Income (GNI)
Gross National Income (GNI) is a measurement of a country's income. It includes all the income earned by a country's residents, businesses, and earnings from foreign sources. Income is defined as all employee compensation plus investment profits.
While GNI can be used for a few purposes, it is mostly used to classify and group economies using purchasing power parity and the per capita method to determine different countries' standard of living to each other.
Background
GNI is the total amount of money earned by a nation's people and businesses. It is used to measure and track a nation's wealth from year to year. The number includes the nation's gross domestic product plus the income it receives from overseas sources. GNI is an alternative to Gross Domestic Product (GDP) as a means of measuring and tracking a nation's wealth and is considered a more accurate indicator for some nations.
Understanding GNI
GNI calculates the total income earned by a nation's people and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid.
The more widely known GDP is an estimate of the total value of all goods and services produced within a nation for a set period, usually a year. Finally, there's gross national product (GNP), which is a broad measure of all economic activity.
Difference Between GNI and GDP
Gross domestic product measures the value of goods and services produced within a country; the measurement includes national output, expenditures, and income. GNI equals GDP plus wages, salaries, and property income of the country's residents earned abroad and at home. It also includes net taxes and subsidies receivable from abroad, according to the Organization for Economic Cooperation and Development.
| Income Earned by: | GDP | GNI | GNP |
|---|---|---|---|
| Residents in Country | C+I+G+X | C+I+G+X | C+I+G+X |
| Foreigners in Country | Includes | Includes If Spent in Country | Excludes All |
| Residents Out of Country | Excludes | Includes If Remitted Back | Includes All |
| Foreigners Out of Country | Excludes | Excludes | Excludes |
Key:
- Personal Consumption (C)
- Business Investment (I)
- Government Spending (G)
- Exports - Imports (X)
Why These Differences Are Important
In many emerging markets, such as Zimbabwe, residents move to other countries where they can earn a better living. Many workers that do this send money back to their families in their home county (Diaspora Remittances). There is enough of this type of income that it influences economic metrics (Remittances and economic growth in Zimbabwe). It's counted in GNI and GNP, but not in GDP.
As a result, comparisons of GDP by country will understate the size of these countries' economies because of the missing financial data (known as worker's remittances)—remittances count for close to 6% of lower-income countries' GDP.
GNI as a Comparison Tool
The World Bank provides GNI data for all countries. To compare incomes among nations, it removes the effects of currency exchange rates by converting everything to the U.S. dollar using purchasing power parity (PPP).
The problem with the PPP method, though, is that it converts all goods and services in a country to what it would cost in the United States. The method works well for products like McDonald's hamburgers that are sold across the world—but does a poor job of estimating the value of goods not sold in America.
Gross National Income (GNI) per capita is a measurement of income to the number of people in the country. It compares the GNI of countries with different population sizes and standards of living. However, GNI does not account for costs of living or subsistence levels—which means that while providing good information about the income levels of the people in a country, it should be used in context with other measurements to grasp a full picture of the income and purchasing power a country's citizens have.[1]
Key Takeaways
- Gross national income is an alternative to gross national product as a measure of wealth. It calculates income instead of output.
- GNI can be calculated by adding income from foreign sources to gross domestic product.
- Nations that have substantial foreign direct investment, foreign corporate presence, or foreign aid will show a significant difference between GNI and GDP.
