Wednesday, March 21, 2007


"In China, a large part of GDP takes place in foreign-owned factories. If we want to mesaure the standard of living in China, wouldn't it be better to use GNP than GDP to allow for this?"

In prinicple you are right. Any profits earned by foreign firms in China ultimately benefit the owners of the foreign firm, rather than people in China. These profits are included in China's GDP, but not in China's GNP. GNP would therefore make a better measure of Mainland China's standard of living.

Ultimately, however, this is an empirical matter, and the difference between GDP and GNP is typically small. For example, in 2005, Mainland Chinese GDP was larger than GNP by 1.5%. The reason for this is that just as the rest of the world owns lots of assets in Mainland China, Mainland China owns lots of assets in the rest of the world. In fact, Mainland China owns more foreign assets ($1218 Billion USD in 2005) than the rest of the world owns Chinese assets ($931 Billion USD) according to the IMF's International Financial Statistics. Many of the Chinese assets earn only small returns (for example, US Government issued Treasury Bills), hence the income flow favours the rest of the world.

Hong Kong is a more extreme case: in 2005, Hong Kong entities owned the equivalent of 8.5 times Hong Kong's GDP in foreign assets, while the rest of the world owned 6.0 times Hong Kong's GDP in Hong Kong assets. Both these numbers are huge by comparison with most other countries, but the difference (Hong Kong's net asset position with the rest of the world) is a whopping 2.5 times Hong Kong's GDP! Yet in 2005, the difference between Hong Kong's GDP and GNP was a miserly 0.2% of GDP. That was low compared with most other years, but as the following graph shows, the differences are usually small, even for Hong Kong.


Very Concerned People said...

I read your article with very strong interest.I am a researcher working on a dissertation that examines dimensions of health in member nations of the United Nations.

I saw your blog, and your explanation of GDP versus GNP. As many of the nations I will be conducting research on (when I look at poverty) may have some variance with regard to GDP vs GNP, I wondered if the GDP standard for wealth begins to show differences between GDP and GNP for nations that are financially poor.

I also was intrigued by the charts you generated, as they are a nice way to show congruence with GDP and GNP. What was your original data source for the GDP versus the GNP (World Bank? Hong Kong /China specific.)

I hope we can communicate a bit outside the blog forum. Your assistance is greatly appreciated.



Ph.D Candidate

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