Does Globalization Smooth Income Growth? ―The Facts Revealed by Differences in GDP and GNP―

As a result of advancing globalization and economic activities that go beyond national borders, gross domestic product (GDP) and gross national product (GNP) are becoming dissociated. The two are the same to the extent that they measure (gross) added value generated during a specific period (e.g., one year). A difference between them is, generally speaking, the former focuses on whether economic activities take place in the country, while the latter on whether the economic activities are conducted by residents of the country. Thus, the relationship between the two is as follows: GNP = GDP + factor incomes from overseas – factor incomes going overseas. This article points to interesting implications of globalization suggested by relative size of GDP and GNP growth variations. Is Overseas Investment Intended to Diversify Risk? As a first step in understanding globalization, the idea of risk diversification (or risk sharing) can be useful. Taking account of the fact that both foreign assets and liabilities are increasing in many countries, risk diversification is likely to be a primary force to drive international capital flows. That said, there is surely a home bias: