Gross Domestic Product as a concept fails to take into account income from domestically owned foreign assets, so it is necessary to have the idea of Gross National Product in order to measure the total income earned by domestic citizens regardless of the location of those earnings. The GNP of a country therefore is a measure of its economic performance.
The income from rent, profits, dividends, interest and so on of foreign assets is known in national income accounting as 'property income': the net flow of which is the excess of the 'in' flow from nationally owned factor services abroad over the 'out' flow - the 'in' flows of all other countries. When there is (as it is theoretically possible that there could be none, although highly unlikely in the globalized world) a net property income between countries, the GDP and GNP will not be equal, for example if the US had an inflow of $3.5bn property income from abroad, but an outflow of $2.75bn, the GNP will exceed the GDP by $0.75bn.
GNP can be divided into two categories: nominal and real GNP. Nominal GNP measures GNP at the prices prevailing when the income was earned. This can be misleading as it does not take into account inflation. This is where real GNP (also known as GNP at constant prices) comes into play, as it measures GNP in different years at the prices prevailing at a set year called the 'base year'. This means that prices from one year are used to compare GNP from many, eliminating discrepancies caused by the change in the value of money. The real GNP is calculated using the 'GNP deflator': a ratio of nominal to real GNP expressed as an index (multiplied by 100).
The annual percentage rise in real GNP shows how fast an economy is growing. To understand how this is affecting the citizens of a country, their standard of living, GNP per capita (per person) can be used. This is calculated simply by dividing the real GNP by the population. Although this gives a general idea of an increase or decrease in standard of living, caution must be assumed when using it, as a percentage increase in GNP per capita does NOT mean that everyone's standard of living has increased - as a mean measure it does not account for the fact that one person may have had a major increase in income and another a severe decrease.
Real GNP is a crude measure of national economic health. It ignores non-market activities such as pollution and housework, and leisure. It is also important to consider the effects of depreciation. However, depsite its problems, GNP is in practice the most widely used method of measuring national economic performance.
GNP is also sometimes known as Gross National Income (GNI)