What’s it: Gross national income (GNI) is the total aggregate income earned by citizens, regardless of where they make it. For example, for the Indonesia GNI, it means income earned by Indonesians abroad and those who live in Indonesia (excluding foreigners in Indonesia). Say, you live in the country, then your income will be counted in the GNI figure. Furthermore, let’s say, your brother is currently working abroad, so your brother’s income will also be included in the GNI calculation. However, your foreign friend’s income, who comes from overseas, is not included in the calculation.
What is the difference between GNI, GNP, and PDB
Gross national income is the same as the gross national product (GNP). Basically, both measure the same thing, it’s just that, the latter uses the production (output) approach.
That is similar to calculating gross domestic product (gross domestic product or GDP). You can figure it using three approaches: output, expenditure, and income. All three will produce the same number.
Next, what is the difference between GNI and GDP?
- GNI calculates citizens’ income, regardless of where they earn it. In the opening sentence above, the income of you and your brother who works abroad in the GNI brother’s income. However, your foreign friends, even if they live in your country, are excluded from the calculation.
- GDP calculates income in a country, regardless of who earns it. Your income and your foreign friends’ income are included in the GDP calculation, but not your brother’s income.
Why GNI matters: Pros & Cons
GNI measures and tracks a country’s wealth from year to year, regardless of where it was obtained. You can divide it by the total population (we call it GNI per capita), which shows the country’s average pre-tax income.
This statistic is more accurate than GDP in describing income, mainly if a country receives a lot of income from abroad. In other words, many citizens work abroad. They send income to their families back home, supporting their well-being. So, they may still enjoy prosperity even though the economy in their home country is sluggish.
But, GNI also has weaknesses. The impact of changes in GNI may not directly impact the health of a country’s economy. Say, your income increases and you buy a car from a domestic manufacturer. The money you spend is a source of income for the car manufacturer. With money from you and other local consumers, producers can buy domestic suppliers’ inputs and recruit domestic workers. Thus, increasing your income has a direct impact on economic activity and employment around you.
But it’s a contrast to your brother. Suppose his income rises and buys a car. In that case, it will only impact economic activity in the country where he lives, not domestically.
Because of this, economists, analysts, and investors look more often at GDP than GNI to assess the activity and health of a country’s economy. That’s because GDP also has implications for other variables such as inflation, interest rates, unemployment rates, investment climate, and economic policy (monetary and fiscal). Therefore, they prefer GDP to measure economic growth.
How to calculate GNI
Since the output, expenditure, and income approaches produce the same figures, let’s calculate the expenditure approach. The formula is as follows:
PDB = C + I + G+ NX
- C = Consumption, which is the value of household expenditures for goods and services
- I = Investment, including the gross investment by the business
- G = Government spending consists of all government spending, except transfer payments because it does not involve exchanging goods and services.
- NX = Net exports (X), the difference between exports and imports
Next, to convert GDP to GNI, we must include factor payments from abroad and factor payments to foreign countries. The difference between the two refers to net foreign factor income (NPFI). Here is the GNI formula:
GNI = GDP + NPFI = C + I + G + NX + NPFI = C + I + G + NX + Factor payments from abroad to domestic – Factor payments to overseas from domestic
Factor payments to overseas represent the income earned by foreigners and foreign companies in the domestic. In the previous example, it was your foreign friend’s income. The distribution of profits from foreign companies to shareholders in their home country is another example of factor payments overseas.
Factor income from abroad includes income earned by citizens or domestic companies in other countries. If a national company operates overseas, a portion of the profits goes to domestic shareholders. These profits fall into this classification.