GNP, GDP, and Current Account: Understanding Key Economic Indicators

Posted on Feb 19, 2025 in Economy

Lesson 2: Understanding GNP, GDP, and the Current Account

GNP (Gross National Product): “The value of all final goods and services produced by the country’s factors of production and sold in the market in any given period.”

GNP only counts final goods to avoid double accounting.

GNP must equal national income. It measures the production of the national factors of production within the country or abroad.


GDP (Gross Domestic Product): measures the volume of production within a country’s borders – everything that has been produced in a country, no matter the origin of the factor of production.

Components of GDP:

  • Consumption: The portion of GNP purchased by private households. It is what you, as a citizen, buy to fulfill your needs and wants. For example, consumption includes what you spend on food.
  • Investment: The portion of production consumed by private companies to produce their own output.
  • Government Purchases: All the consumption and investment of local and national authorities, from the construction of a hospital to the money spent on education. Transfer payments, those in which the recipient does not provide anything in return, are not considered (e.g., unemployment insurance payments).
  • Current Account: It is part of the balance of payments.

The current account is the difference between exports and imports.

When a country is importing more than it is exporting, we say it has a current account deficit. If it is exporting more than it is importing, it has a current account surplus. If a country is incurring a current account deficit, it has to fund it somehow.

If we are importing more than what we are exporting, we need to borrow money and thus increase our foreign debt. That means that at some point in the future, we will have to export more than what we import.

Having a long and sustained current account deficit can lead to a large foreign debt and a negative net international investment position (IIP), the difference between a nation’s claims on foreigners and its liabilities to them.

CA deficit: consuming more than producing.

Will Depreciation Improve a Current Account Deficit?

It depends. Exports will be cheaper, and imports will be more expensive.

In a recession, you would expect a fall in consumer spending and therefore lower spending on imports. Usually, this fall in import spending causes a reduction in a current account deficit.

Effect of Depreciation:
  • Imports more expensive → decreased quantity of imports.
  • Exports cheaper → increased quantity of exports.

This will make the current account and balance of payments improve.

If there is a depreciation in the exchange rate, then that particular country will experience a fall in the foreign price of its exports. It will appear more competitive, and therefore there will be a rise in the quantity of exports. Assuming demand for exports is relatively elastic, then a depreciation will lead to an increase in the value of exports and therefore improve the current account deficit.

Similarly, a depreciation of the exchange rate will also lead to an increase in the cost of buying imports. This will lead to a fall in demand for imports and also help to reduce the current account deficit. Therefore, in theory, a depreciation in the exchange rate should improve the current account.