Stephen Donnelly on How the Difference Between GDP and GNP is Crucial to Understanding Ireland's Situation

Ireland is in trouble. But outside Ireland, many economists think it is doing fine. Why? Stephen Donnelly argues that part of the answer turns on the difference between Gross Domestic Product and Gross National Product. Gross Domestic Product (GDP) is the value of goods and services produced within a country each year or quarter. Gross National Product (GNP) is the value of goods and services produced by the labor, capital and other resources owned by citizens of a country each year or quarter. For most countries, GDP and GNP are close to each other, but Ireland has attracted so much foreign investment that a large share of its capital stock in owned by foreigners. Thus, Ireland’s GNP is much lower than its GDP.

The presence of the foreign-owned capital raises wages in Ireland, so it is a good thing. But the income from the foreign-owned capital itself does not belong to Irish citizens, and so is not much help when it comes to handling the debt of the Irish government–especially since the Irish government needs to keep the promise to tax foreign-owned capital lightly that it made in order to attract foreign investment.