Which scenario would increase GDP but not GNP?

• A. Production by residents abroad
• B. Production by foreign firms within the country
• C. Increase in government spending
• D. A rise in exports minus imports

Answer: (B)

GDP measures the value of goods and services produced within the country’s borders, regardless of who owns the producers. GNP, on the other hand, measures the value produced by the country’s residents, regardless of where that production occurs. When a foreign firm operates inside the country, the extra output adds to GDP because production happens domestically. However, the income from that production goes to non-residents, so it does not boost the residents’ income and thus does not raise GNP. That’s why this scenario increases GDP but not GNP. If residents produced abroad, GNP would rise; if government spending or net exports change, effects depend on who owns the production and where it happens, so they aren’t as clear-cut for increasing GDP without affecting GNP.