Free GNP Calculations Essay

“Calculations of Gross National Product (GNP) especially in poor countries are largely guesswork and even if they were accurate the GNP itself can be a very poor measure of welfare”.

Discuss this view of the problems of measuring and using GNP statistics.

Introduction

Gross National Product (GNP) in simple terms is the total market value of all final goods and services produced by the citizens of a country. It is equal to the Gross Domestic Product (GDP) minus the net income of the foreigners.[1] GNP is used to measure economic growth. It is believed to be synonymous with the health of the economy and economic progress. The following paper analyses the role of GNP and whether it truly reflects the economic welfare and growth of a country and especially in relation to the poor countries. It is an essential phenomenon that countries grow and the benefits of growth must reach all sections of the society this would be welfare in the true sense of the word. Thus concepts like GNP and GDP have come into being to reflect the actual state of the economy. It has however, been debated by economists whether GNP is the true measure of welfare and growth especially in poor countries.

Prior to starting the discussion on GNP and its relevance, it is important to highlight the meaning of economic welfare and development. Todaro and Smith (2003) state that in strict economics terms economic development refers to the capacity of a national economy, whose initial condition has been more or less static for a long time, to generate and sustain an annual increase in its Gross National Product (GNP) at rates of 5%-7% or more. In addition to the above, it is also a planned alteration of the structure of production and employment in a manner where there is a shift from agricultural dependence to industrialisation, as well as, it should indicate an improvement in certain social indicators like, gains in literacy, schooling, health conditions and services, were also seen as principal measure of development.

The classical economists in highlighting the key difference between economic growth and economic development stated,

“Economic growth refers to the increasing ability of a nation to produce more goods and services. Economic development … implies that individuals of that nation will be better off and takes into account changes in economic and social structures that will reduce or eliminate poverty.”[2]

Thus, quantitative figures in terms of higher salary, higher volume of production does not reflect upon the welfare of the society, even though it may reflect a high GNP. It has been argued that in less developed countries GNP cannot be seen to accurately represent the welfare level. One of the arguments put forward has been that there are different approaches by which GNP can be arrived at. The differences are present based on which viewpoint one is looking i.e., whether the transactions that determine the prices of final goods and services are looked at and tallied up by focusing on the buying or focusing on the proceeds from selling or by focusing on the nature of the products themselves.

Thus it can be said that GNP and GDP are very closely related concepts in theory, and in actual practice the numbers tend to be close to each other for most large industrialised countries. The differences between the two measures arise from the fact that there may be foreign-owned companies engaged in production within the country’s borders and there may be companies engaged in production within the country’s residents that are engaged in production in some other country but provide income to residents.

According to Roemer et.al. (2001), one of the key determinants of the rate of growth in an economy is the high level of output. They further state that empirical evidence suggests that countries reflecting a high level of economic growth tend to have a larger capital stock like more roads, bridges, power generators, factories etc. In other words they have a more developed and organised infrastructure. Economic theory suggests that output depends on labour productivity, which further depends on level of education and general health of the population. Natural resources like petroleum are important for a country as well. However, countries that adapt and develop new technologies grow at a faster rate. The role of government within an economy also is an important factor with regards to how the resources will be allocated in an economy and how liberalised the approach is. Therefore, it can be said that history, culture of a country would also have an impact on the economic growth. Thus from the above perspective it would be appropriate to say that economic development is a concept which can only be associated with the developing countries.

COUNTRY NAME 1999 2000 2001 2002 2003
India 4.40E+11 4.56E+11 4.78E+11 4.95E+11 5.68E+11
Jamaica 6.68E+09 6.98E+09 7.03E+09 7.05E+09 7.28E+09
Low & middle income 5.72E+12 5.93E+12 6.04E+12 6.15E+12 6.76E+12
Low income 8.37E+11 8.61E+11 8.94E+11 9.19E+11 1.04E+12
Lower middle income 3.33E+12 3.40E+12 3.40E+12 3.54E+12 3.93E+12
Nepal 5.07E+09 5.42E+09 5.66E+09 5.52E+09 5.82E+09
Poland 1.67E+11 1.72E+11 1.77E+11 1.80E+11 2.01E+11
Portugal 1.12E+11 1.12E+11 1.09E+11 1.09E+11 1.24E+11
Sierra Leone 6.51E+08 6.34E+08 6.91E+08 7.23E+08 8.08E+08
Singapore 9.06E+10 9.24E+10 8.86E+10 8.82E+10 9.02E+10
Spain 5.92E+11 5.99E+11 5.89E+11 5.96E+11 6.98E+11
Sweden 2.53E+11 2.54E+11 2.38E+11 2.32E+11 2.58E+11
Turkey 1.85E+11 2.01E+11 1.66E+11 1.74E+11 1.97E+11
United Kingdom 1.41E+12 1.48E+12 1.49E+12 1.51E+12 1.68E+12
Uruguay 2.09E+10 2.03E+10 1.88E+10 1.47E+10 1.29E+10
Vietnam 2.81E+10 3.02E+10 3.23E+10 3.48E+10 3.88E+10
Yemen, Rep. 6.58E+09 7.28E+09 8.49E+09 9.15E+09 9.89E+09
Zambia 3.20E+09 3.13E+09 3.30E+09 3.46E+09 3.94E+09

Source: World Bank Website[3]

The above table shows the GNP indices from 1999-2003. In the case of less developed economies and accuracy of the data collected is always under question. The countries are not developed and they do not have appropriate systems to gather the required data. This combined with the fact that GNP itself has several inherent discrepancies does not truly reflect the welfare levels of the less developed economies.

GNP and GDP are considered to be the most comprehensive measures of the overall amount of economic production taking place in a national economy. They are measured in money value terms to get around the problem of adding up total output of many different goods and services that are normally expressed in many different kinds of incomparable physical units.

Using the product or output approach, GNP can be estimated by summing up the output of all the various organisations producing goods and services in the country, subtracting the costs of their raw materials to avoid double counting and making suitable adjustments for depreciation and for the value of imports and exports. GNP ignores any privately done activity, which adds value. For example, a mother taking care of her children is doing an economic activity and is not getting paid for it, or an individual who des gardening himself instead of hiring anyone else to do it for him; these activities are not added in the measurement of GNP.

Economic welfare and development can be measured in a number of different ways including the Human Development Index, a Gender Empowerment Measure, a Human Poverty Index and a Human Freedom Index. The United Nations Development Program developed these measures. The World Bank also has its own indicator called the World Bank Development Indicator. Globalisation can have both negative affects on a nation. It can impact on the levels of economic growth a country may experience, impact on levels of unemployment or it may impact on a country’s quality of life.

This is particularly important when referring to GNP in relation to poor countries. Though less developed economies are not developed primarily because they are not being benefiting from the use of modern technology to increase production levels, however, they are still engaging in private services which do contribute to the welfare of the society. GNP does not take into account the level of inflation in the economy, thus it makes it impossible to compare one year’s figure to the next. Writers have argued that GNP is an incomplete measure of economic welfare since levels of current production do not necessarily reflect the levels of accumulated wealth.

Due to inherent flaws in GNP, the search for alternatives to GNP therefore questions growth-orientation. It must be noted that it can be very difficult to challenge paradigms. Modern economics is mechanistic rather than organic (Cobb and Cobb 1994, p. 278). That is, it prefers to see itself as an actual science, with rigorous laws, rather than a social science, in which there are only theories. Those who question growth’s desirability are often received incredulously, as if growth were an irrefutable law of nature (van Dieren 1995, p. 4).

An increase in GNP is good only in the sense that when money is spent, someone gets it, and that someone is happy about it. Whether it is good in the larger, societal sense depends on who spent it, who got it, who bought it and what parts of the transaction were not accounted for. Thus it is advised that when it is said that GNP has grown, one must question for whom, at what cost and at whose expense. It is suggested that indicators of national progress should be developed that reflect more accurately real values and our real welfare. In addition to arriving at GNP, it is important to note that in poor countries the accuracy of data has to be questioned too. The means are not there to accurately derive the figures as the supporting infrastructure and systems are inadequate and in many cases missing.

Conclusion

From the preceding paragraphs to can be said that GNP provides an economy’s health status even though it cannot be regarded as an accurate indicator of economic welfare and development. GNP measures the flow of money in the economy and does not measure economic welfare, as they include a number of factors, which decrease human and environmental welfare. It is a known fact that monetary measures are not good measures of community sustainability. Discrepancies also exist due to the calculation methods and the different approaches by which GNP is arrived at. Secondly, some have even argued that GNP does not take into account inflation and does not include private services like taking care of children, cooking for family etc. This is particularly important from the perspective of less developed economies because it is difficult to obtain accurate data and statistics. Thus it can be sad that GNP does not accurately reflect the welfare levels of an economy.

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BIBLIOGRAPHY

  1. Gwartney, James D., Stroup, Richard L., and Sobel, Russell S., Economics Private and Public Choice, (2000), Ninth Edition, The Dryden Press.
  1. Meier, G.M. and Rauch, J.E., Leading Issues In Economic Development, (2000), Seventh Edition Oxford University Press
  1. Perkins, Radelet, Snodgrass, Gillis and Roemer, Economics of Development, (2001), Fifth Edition, Oxford University Press.
  1. Sheffrin., Steven M., and O’Sullivan, Arthur, Microeconomics: Principles and Tools, (2001), Second Edition, Prentice Hall
  1. Taylor, John B., Principles of Economics, (1998), Second Edition, Houghton Mifflin Company
  1. Todaro, M.C. and Smith S.C., Economic Development, (2003), Eighth Edition, Pearson Addision-Wiley

Other Sources

http://hdr.undp.org

www.economist.com

www.ft.com

www.hbr.org

www.worldbank.com

Footnotes

[1] GNP in terms of equation can be expressed as:

Employers Compensation + Proprietor’s income + Rents + Corporate Profits + Interest = National Income

National Income + Depreciation + Indirect Business Taxes = Gross National Product

[2] Meier, G. and Rauch, J.E., Leading Issues in Economic Development, Eighth edition, Oxford University Press (2000)

[3] http://devdata.worldbank.org

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/free-gnp-calculations-essay.php


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