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Gross Domestic Product

There are two ways to measure how much economic activitythe production, distribution, and use of goods and servicesa country generates. The old way was called gross national product, abbreviated GNP. But this isnt really a useful way to measure to a nations output. Actually, it is useful, but its not as accurate as it could be. Today, most people speak instead of gross domestic product (GDP), which is different. Its similar in that it measures economic output, but its different in that it measures all economic output within U.S. borders, regardless of who owns the companies involved, and it doesnt measure the output from foreign operations of U.S. companies. In other words, GDP measures all the economic output taking place on U.S. soil.

The problem with gross national product (GNP), two problems really, is that it measures all the output from U.S.-owned companies, even from their operations in other countries, and it also excludes output from foreign companies operations within the United States, which isnt really an accurate way to measure the U.S. economy. Reason being that economic output in other countries is really a reflection of the economy in those countries, not the United States.

Take, for example, a Honda plant in California. The output of this facility would be included in the GDP but not in the GNP. You can see why.