Foreign capital based economy does not translate into more welfare for the people

Chakravarthi Raghvan drew my attention to a very important issue that most of us find it very difficult to decipher. We therefore tend to accept what is being told to us. I am talking of the relationship (or difference) between GDP (Gross Domestic Product) and GNP (Gross National Product). Many of us use the acronyms inter-changeably or as if they are synonyms. He wrote: "Those moaning and bemoaning failure of the government to push through 100 percent FDI in retail trade, equating more FDI with more growth and 'welfare' (Financial Times has both a news report and comment), might look at the Paul Krugman blog on difference between GDP and GNP in such cases as the Irish example, where Foreign investor based economic growth (GDP) actually did not translate into welfare for ordinary Irish (GNP)." 

I was curious to know how is he substantiating his statement. I looked at Paul Krugman's blog and found it very fascinating. Under the caption Irish Pfizer Smiling, he writes: "Ireland, you see, is a country with an extraordinary amount of foreign-owned capital; this means that gross national product, the income of Irish residents, is substantially smaller than gross domestic product, the income generated in the country. We normally focus on GDP, because it’s easier to measure accurately, but in Ireland’s case this can be misleading — because the gap between GDP and GNP has been widening." It means that the more foreign capital flowing into your country does not translate into welfare of the people, as measured by GNP. In other words, what Chief Economic Adviser to Prime Minister, Kaushik Basu, deputy chairman of the Planning Commission Montek Singh Ahluwalia, and a horde of other neoliberal economists are saying in support of FDI in multi-brand retail, as if it is going to be the panacea for all economic ills, is simply incorrect. 

Krugman illustrates with a diagram that tells us how the Irish GDP has been steadily going up in 2011, but the GNP is not keeping pace. He says: "The slump has been deeper, and the recovery even less apparent, when you look at GNP -- which is what matters to the Irish -- rather than GDP. What's going on here? As I understand it, the recent rise in Irish exports is largely a matter of capital-intensive multinationals -- especially pharma -- ramping up Irish production. This is good for GDP, but generates very little income for Irish residents, so that GN doesn' gain." Thank you Krugman for explaining it so simply and clearly (for those who would like to look at the blog post, here is the link: http://krugman.blogs.nytimes.com/2011/12/06/irish-pfizer-smiling/).

To know how does GDP compare with GNP, I tried searching on the net. Here is what I found: GDP vs GNP http://www.diffen.com/difference/GDP_vs_GNP I will try to decipher the complex web in one of my future blog posts.