Measure for measure

The tangled tale of GDP and GNP

ANY first-year economics student knows that national-income figures can be collected in three different ways, using income, output or expenditure numbers. Although the three are supposed to produce the same result, they rarely do. But the differences are tiny compared with a more obscure oddity that affects the Irish economy: the huge gap between gross domestic product (GDP) and gross national product (GNP).

GDP is the more common measure of national income, to which GNP adds an item known as net transfers of factor incomes. This means adding the overseas profits of Irish companies that are repatriated to Ireland, and subtracting the profits of foreign multinationals operating in Ireland that are sent abroad. In most countries the two numbers will be small, and may also broadly balance out. But because of Ireland's large FDI base, coupled with its enticingly low corporate taxes, lots of big foreign companies make (or at least report) big profits in Ireland which they transfer back to their head offices. As a result, Ireland's GNP is as much as 25% smaller than its GDP.

What this means in practice is that GDP figures overstate the national income available to Irish people to spend. Ireland's diplomats in Brussels wised up to this long ago. When they want to crow about the brilliant economic policies that created the Celtic Tiger, they use the GDP figures, noting proudly that Irish GDP per person is now the third-highest in the EU, well above Britain's. However, when the talk turns to EU regional subsidies, the diplomats switch to the “more appropriate” GNP measure, which puts Ireland close to the EU average, and mutter about the country's huge infrastructure backlog.

As the Irish economy develops, GDP and GNP might be expected to converge, but instead the gap seems to have widened recently. That is largely because American multinationals have been racking up (or at least recording) such big profits in Ireland. In some ways, this is a mark of the country's economic immaturity, and its failure to nurture indigenous industry. Chris Coughlan, a vice-president of HP Compaq and chairman of the Galway Chamber of Commerce, suggests that Ireland's future success could be measured in part by whether GDP and GNP converge, which would indicate that home-grown industry has matured. That might, sadly, put an end to another splendid quirk with which to confuse those first-year students: that Ireland's total exports exceed the country's national income.

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