Critiques of the Gross National Product - Essay Example

Gross National Product (GNP) is an estimate of the total money value of all the final goods and services produced in a given one-year period by the factors of production owned by a particular countrys residents. GNP and GDP are very closely related concepts in theory, and in actual practice the numbers tend to be pretty close to each other for most large industrialized countries. The differences between the two measures arise from the facts that there may be foreign-owned companies engaged in production within the countrys borders and there may be companies owned by the countrys residents that are engaged in production in some other country but provide income to residents. So, for example, when Americans receive more income from their overseas investments than foreigners receive from their investments in the United States, American GNP will be somewhat larger than GDP in that year. If Americans receive less income from their overseas investments than foreigners receive from their US investments, on the other hand, American GNP will be somewhat smaller than GDP (http://www.context.org/PEOPLE/celeste/gnpp.htm). Equivalent estimates of GNP (or GDP) produced in a given year may theoretically be arrived at through at least three different accounting approaches, depending upon whether the transactions that determine the prices of final goods and services are looked at and tallied up by focussing on the buying or by focussing on the proceeds from selling or by focussing on the nature of the products themselves. Using the expenditure approach, you can estimate total GNP as the sum of estimates of the amounts of money that are spent on final goods and services by households (Consumption), by business firms (Investment), by government (Government Purchases), and by the world outside the country (Net Exports). Using the incomes approach, you can estimate total GNP by summing up estimates of the different kinds of earnings people receive from producing these same final goods and services: Total wages and salaries Profits of incorporated and unincorporated businesses Rental incomes Interest incomes (Plus certain adjustments to account for wear and tear on productive assets like plant and machinery -- depreciation -- and what are called indirect business taxes). Using the product or output approach, you can estimate GNP by summing up the output of all the various organizations producing goods and services in the country, subtracting out the costs of their raw materials to avoid double counting and making suitable adjustments for depreciation and for the value of imports and exports. (Butt 2002, Kopecky 1995) (In theory, all three approaches should give you the same grand totals -- but of course in actual practice there will be discrepancies, and sometimes sizable discrepancies, between the three estimates.) The GNP index was originally devised to measure the mobilization of arms production during World War II -- and still includes the production of bombs, bullets and tanks. But it completely ignores the value of natural resources, education, unpaid subsistence labor, and self-employment labor which accounts for over half of the worlds production and nearly 80 percent of its capital investments. Many politicians in less-developed countries believe the GNP scorecard is rigged in favor of industrial countries. They cite perverse, no-win effects of trying to please the International Monetary Fund by boosting their GNP growth: increasing environmental depletion rates, increasing unemployment, and, often, uneven income distribution. We already see similar effects in Eastern Europe where GNP-oriented economic reforms are creating dangerous economic backlashes, such as soaring unemployment in Poland (Gilman 2000). In the emerging global village, the study of national economics has become increasingly combined with the study of social and ecological issues that are far too important to be left to the economists realm. Until recently, developed nations governments and their economic bureaucracies have helped perpetuate the legitimacy of the GNP, since charging these comparative scorecards might show them in an unfavorable light. So, for instance, depending on what assumptions are made in national accounting methods, a national deficit can be made to look even larger than it is, or the budget in surplus (by treating education, for instance, as investment rather than expenditure as it is currency treated). But each government puts its own spin on national economic statistics. For example, in the 1970s and 1980s, the USSR systematically overstated its GNP growth. Similarly, the Organization for Economic Cooperation and Development (OECD) countries have downplayed unemployment figures by redefining full employment from 2 percent unemployment in the 1960s to 7 percent in the late 1980s. Virtually all countries ignore environmental costs, natural resource depletion rates, and, oddly, add into the GNP as useful production the costs of environmental cleanups (Anderson 1991, Emerson 1989). The available statistics produced by government agencies are always far from perfect estimates of what they purport to measure. 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. Microeconomic theory gives us lots of reasons for believing that the relative prices at which products trade on a free market represent reasonably unbiased estimates of the relative values consumers put upon the various kinds of goods and services traded -- at least where there are no large problems with externalities or public goods. But not all the final goods and services produced in a society are traded on the free market, and the relative contributions of these untraded goods and services to the consumers material living standards are therefore awfully difficult to estimate very well. Most of the services produced by government, to take the largest example, cannot be valued at a free market price because they are not offered for voluntary purchase on a free market -- instead, the presumed beneficiaries of these services (the citizenry) are forced to pay for them through taxes, whether they think the benefits are "worth it" or not. In compiling the national accounts, the government statistical offices simply make the heroic (and self-flattering) assumption that all the goods and services provided by government are "worth" at least what was spent to produce them, however outrageous the costs might have been and however worthless (or harmful) the output might have been in the eyes of the citizenry (La Buda 2000). If one wants to use GNP (or GDP) to measure changes in overall levels of economic production from one year to the next, then using money prices as a "common denominator" for adding up all the disparate kinds of goods and services introduces another problem for the accuracy of the estimates -- inflation. Using money valuations to measure output at several points in time is a little like using a rubber tape-measure to measure several different distances. Part of the increase in GNP from one year to the next really is the result of increased output, but part is also likely to be due merely to change in the value of the currency unit used to measure it. Government statistical compilers try to deal with this problem by producing estimates of "real" or "constant dollar" GNP (and GDP), dividing their original ("current dollar") estimates by one or another of many possible "price indexes" constructed to account for and remove the effects of general price inflation -- but the problems of choosing and constructing appropriate price indexes for this purpose are themselves numerous and admit of no single unambiguous "best" answer to the problem (Cobb et al. 1995). It is also important to keep in mind that GNP and GDP (even when divided by the size of the population to produce "per capita GNP") were never intended even theoretically to be good measures of overall economic welfare: they are at best only measures of recent levels or rates of productive activity. Overall societal welfare is a broader concept than just economic welfare, and GNP (or GDP) is at best only a very incomplete measure even of economic welfare, since levels of current production do not necessarily reflect the levels of accumulated wealth actually at the disposal of the citizenry. Moreover, the greater availability of leisure time made possible by todays higher levels of productivity is pretty clearly an improvement in our economic welfare over the days of the early 19th century 14-hour workday. But this improvement does not show up at all in our long-term GNP growth rates -- except possibly in a backwards way, since our official GNP would no doubt be much higher than it is today if everyone still worked a 14-hour workday using our modern technology instead of "wasting" all those potential labor hours on "nonproductive" recreation, relaxation, contemplation and socializing. And of course aggregate GNP and GDP do not give any indication as to who gets to consume how much of the goods and services produced, nor do their compilers exercise any "judgment" about what these goods and services are or ought to be. Bibliography Anderson, Victor (1991). Alternative Economic Indicators. London and New York: Routledge. Butt, Nicholas (2002). Economical Digest – 2001. New York: Routledge. Cobb, Clifford, Halstead & Rowe (1995). The Genuine Progress Indicator. San Francisco: Redefining Progress. Emerson, Gregory (1989). Is Our Country Prosperous? London. Gilman, Robert (2000). "From Dismal Science to Joyful Art." New York. Kopecky, Thomas (1995). Modern Economy. Boston. La Buda, Joseph (1999) Critiques of the GNP. San Francisco: Redefining Progress. http://www.context.org/PEOPLE/celeste/gnpp.htm Read More