Why GNI Per Capita Is Better Than GDP for Living Standards

Economic indicators assess a nation’s financial health and citizen well-being. Gross Domestic Product (GDP) and Gross National Income (GNI) are key measures offering insights into economic activity and national prosperity. While distinct in their methodologies, both contribute to a comprehensive view of national well-being.

Understanding Gross Domestic Product (GDP) Per Capita

Gross Domestic Product (GDP) represents the total monetary value of all finished goods and services produced within a country’s geographical borders over a specific period, typically a year. GDP serves as a fundamental indicator of the overall size and health of a national economy, reflecting its productive capacity.

GDP is often presented “per capita” by dividing the total GDP by the country’s population, yielding an average economic output per person. This figure helps compare economic productivity across countries and serves as a proxy for average material well-being.

Understanding Gross National Income (GNI) Per Capita

Gross National Income (GNI), formerly known as Gross National Product (GNP), measures total income earned by a country’s residents and businesses, regardless of where it was generated. This includes income from domestic production and income received from abroad, such as foreign investments and remittances.

A key distinction from GDP is GNI’s focus on national ownership and residency. GNI incorporates income sent back by citizens working overseas and profits repatriated from domestic companies’ foreign subsidiaries. Conversely, it excludes income earned within the country by foreign entities that is then sent out. This makes GNI a measure of the total income available to a nation’s residents.

GDP’s Scope in Measuring Living Standards

While GDP measures economic output, its scope is limited as a sole indicator for living standards. GDP reflects production within a country’s borders, but this does not always translate to income available for residents.

For instance, foreign-owned multinational corporations may generate a significant portion of a country’s GDP. Profits from these entities are often repatriated to their home countries. This means that while economic activity contributes to GDP, the resulting income does not accrue to citizens. Consequently, high GDP might overstate financial resources available to the average resident, as wealth leaves the country.

GNI’s Reflectiveness of Available Income

GNI offers a more direct reflection of the actual income available to a country’s residents, making it a more suitable measure for assessing the standard of living than GDP. GNI accounts for net factor income from abroad, which includes income earned by citizens working overseas and remitting money home, and investment income from assets held abroad. It also subtracts income earned by foreign entities within the country that is sent out. This comprehensive approach paints a more accurate picture of residents’ purchasing power and financial resources.

The inclusion of remittances is significant for countries with large diaspora populations, where money sent home by expatriate workers forms a substantial part of national income. This directly enhances household disposable income, enabling consumption, savings, and investment, thereby improving material well-being. By focusing on income accruing to residents, GNI better captures the financial capacity influencing the average person’s standard of living.