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GDP & GNI | Here’s The Difference
How do we determine how well a country performs economically?
Just like individuals compete in sports, countries compete against each other in global markets.
The primary measure of a nation’s economic health is Gross Domestic Product, otherwise known as GDP.
GDP to the economy is like income to you. It is the monetary value that’s given to the output the country has produced in a given period of time: much like your yearly salary. It only accounts for ‘added value’, which means the difference between the final value of something and the value of its inputs.
For example, let’s say a car garage makes £150,000 in revenue. That year, the mechanic/business owner had to buy £90,000 worth of inputs (car parts and other costs). This means the added value is £60,000.
GNI (Gross National Income) is slightly different. It measures the sum of citizens’ income in one country. Where it differs from GDP is because we can’t use GNI to compare against other countries. This is because the cost of living varies from country to country.
For example, a Big Mac meal might cost £5.50 in the UK; whereas in the USA it might cost £4.50. The cost of living is therefore higher in the UK. So, if the UK and the USA had equal GNI values, it wouldn’t necessarily mean the same thing because the cost of living is higher in the UK.
To make better comparisons between countries’ national income levels, economists developed the PPP (purchasing power parity). This determines a currency’s purchasing power in terms of how many goods it can buy.
For example, in India, the PPP conversion factor between 2009 and 2013 was 0.3.
Simplified, we can demonstrate this in the below example:
1. Assume you want to buy 1lb of chicken in India
2. In the USA, the price is $5
3. In India, the same chicken would cost roughly 30% of the price of the USA
4. Therefore, in India we would expect the price to be equivalent to $1.50.
5. So, $1 dollar buys more than 3x the amount of goods in India than in the USA
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