As a metric of how well economes are doing, gdp is underrated, as I argue in my latest Bloomberg column. Here is one bit:
If a nation has a lot of foreign direct investment, as does Ireland, GDP will exceed GNP by a considerable amount. According to the Irish government, the country’s GDP is about 370 billion euros. Its GNP is less than 300 billion euros. The difference in GDP and GNP is largely accounted for by the outflow of profits to foreign-owned multinationals.
This isn’t just a story about Ireland. Many other nations have had significant differences between their GDP and GNP, including many developing nations and, at times, Singapore.
The conventional wisdom is that GNP is the proper measure of living standards, because domestic citizens do not have claims on the profits of foreign multinationals. That isn’t wrong, but it is also an incomplete answer. When it comes to the future prospects of a country, GDP is a better indicator. Countries that have a high ratio of GDP to GNP are especially promising, though there are some caveats.
A relatively high GDP is a sign that a large number of foreign companies view the future of the domestic economy as bright. They are “putting their money where their mouth is.”
In the case of Ireland, the country is now the only member of the European Union in which English is the main language not only for business but also for schools and public life. Foreign investors are drawn by that fact. They also see that Ireland is relatively underpopulated, and appears to be receptive to absorbing talented foreign immigrants. Furthermore, Ireland is ruled by mainstream parties and seems largely unaffected by the populism and nativism that are creating problems elsewhere in Europe.
All these realities are reason to be bullish. It is also reasonable to expect that the Irish government will be relatively friendly to business looking forward.
There are also countries in which GNP is much higher than GDP, such as East Timor during its times of receiving lots of foreign aid. I regard that as a bearish sign, just as I regard the higher GDP number as a bullish sign.
Hope I get to visit East Timor some day!