What are the limitations of GNP?

Introduction to Gross National Product

Calculating GNP

    In order to calculate the GNP of a country, a few values need to be known. These are:

• Household and personal consumption expenditures - 'C'

        - the amount of money that the population spends in a given             period of time.

• Gross private domestic investment expenditures - 'I'

        - the amount of private business capital that is invested in                 domestic production (i.e purchase of fixed property or                     inventory)1

• Government consumption and gross investment expenditures - 'G'

        - the amount of money that the government spends or invests             into the economy (e.g. building roads etc)

• Value of net exports - '(X-M)'

        - the amount of money spent by foreigners on goods and                     services produced in the home economy minus the amount              of money spent by the domestic population on importing              goods and services2

• Net income - 'NI'

        - the value of the difference between the income received by             the domestic population, and the income received by non-               residents located in the country3

Using these values the gross national product of a country can be calculated using the following equation:

GNP = C + I + G + (X-M) + NI

Joseph Stiglitz

    Joseph Stiglitz is an American economist with strong views on a variety of topics including the management of globalisation, free market economists and some global institutions such as the World Bank and the IMF. Below is a short clip of him offering his criticisms of GDP as well as him explaining a few differences between GDP and GNP.  

    GNP is very similar to Gross Domestic Product and it can be difficult to know and understand the difference. GDP measures the the strength of a country's local economy by estimating the total value of production and services within the country's border. It includes both the nationals and foreigners contribution to the production and services. GNP on the other hand looks at only the nationals of the country, regardless of where they are located in the world. The image below shows the difference in a diagrammatic form. 

Advantages and Disadvantages

    Using GNP to measure wellbeing has one distinct advantage over any other methods of measuring the standards of living: it is based on a theory which analyses the relationships between consumers and firms in producing goods and services. 

    The basic idea behind it is that the value of goods and services produced in a country can be derived from the marginal utility for the consumer. The marginal utility is the additional satisfaction a consumer gains from consuming one more unit. The market price is equal to the marginal utility when in equilibrium, and therefore the aggregate value of a bundle of goods and services is equal to the monetary expenditures (the money spent) made by the consumers.4

    GNP should not be used as an indicator for well-being. Despite its one great advantage over other methods, it has many disadvantages that outweigh the advantage. Some of these problems include:

        1. It does not actually measure the living standards of society

                - It is possible that GNP can increase year after year                        while the median income decreases, and the poverty                     rate increases. This demonstrates an obvious flaw                        in the measure.

        2. GNP takes into account a number of factors that determine                 a society's well-being. 

                - e.g. environmental impact of growth, sustainability,                         health of the population, infant mortality rates,                             malnutrition rates etc.

The Gross National Product (GNP) and the Gross Domestic Product (GD) are two important factors for a country’s economic definition. Do you know how the GNP is decided? What is the meaning of the GNP? What is the difference between the GNP and the GDP? Also, how can we calculate the GNP?

First, let us learn about the meaning of the related terms.

What is the GNP?

The term GNP expands to Gross National Product. It is a fiscal term that is the estimate of the total value of all the final products and services produced in a particular time by a country's residents. In layman’s terms, GNP is calculated by taking the entire accounting of a company’s residents. 

GNP includes the sum of private domestic investment, personal consumption expenditures, government expenditure, net exports, and other income earned by residents. From this sum, the domestic economy earned by the foreign residents in India is subtracted.

What are the components of the GNP?

Components of the GNP

The GNP or the Gross National Product depends on various factors such as net exports, domestic investment and government expenditure. Let us understand these components step by step.

The major components of the GNP are listed below:

Personal Consumption Expenditures:

Personal consumer expenditure is the expenditure of a consumer in a particular time. For example, for a month Danish spends INR 2500 on room rent, INR 400 on water, and INR 100 on electricity. The total personal consumption expenditure of a Danish person for a month is INR 3000.

Net Exports:

The value of net exports for a country is calculated by subtracting the total imports from the total exports. This component is responsible for balancing trade of the nation.

Government Expenditure:

Government expenditure is the fiscal expenses done by the government on purchasing goods and services. The government expenditures are classified into three categories, government consumption, transfer payments, and interest payments.

Private Domestic Investment:

The private domestic investment is just the other name for the gross domestic product investment (GDPI). It is the investment done by the citizens within the country.

Other Expenditures:

The other components of the gross domestic products include the fiscal expenditures which are not included in any of the above categories.

How to calculate the GNP of a country?

There are two different ways in which GNP of a country is calculated by two different methods:

By the means of GDP:

The GNP of a country is calculated by adding net income from abroad to the GDP of the country.

GNP = GDP + Net income factor from abroad

By the means of GNP:

The components of the GNP are discussed above. The GNP of a the country can also be derived from the following formula,

GNP = C + I + G +X + Z.

Where,

C represents consumption expenditure,

I represents investment,

G represents government expenditure,

X represents net exports,

And, Z represents net income earned by the domestic consumers.

What is the difference between GDP and GNP?

The GNP stands for Gross National Product, while GDP expands for Gross Domestic Product. The GNP is measured by calculating the production and services produced by a country’s citizen while the GDP is calculated by measuring the products and services produced within the territory of the country.

Read more at, Introduction to GDP

In simple language, the GNP is not affected by the boundary of the country, while the GDP is a boundary or limit dependent measure. Let us consider the difference by reading the following examples.

A is the best friend of B.  A lives in India while B is working abroad. Now, both A and B will produce some products or services in a year. At the end of a particular year, the products or services produced by both A and B will be considered in calculating the Gross National Product of India, but the services of B will not count in calculating the GDP, Gross Domestic Product for India.

What are the advantages of the GNP?

The GNP or Gross National Product is often used as the economic criteria for a country’s growth and progress. Let us learn the ways in which GNP is an important factor. Mentioned below are the advantages of the Gross National Product (GNP):

Provides Data to Economists:

A huge proportion of economists solely rely on the GNP data to learn and study about the nation wide issues such as inflation and poverty.

Indicates the Country’s Production:

Collecting a country’s economic data related to the GNP and then comparing it with the previous year data gives an idea about the annual production of the country.

Supports Globalization:

The GNP is calculated, keeping in mind the entire globe as a nation. As while measuring the GNP for a country, its income factor from foreign sources is also counted. Thus, the GNP supports the concept of globalization.

Indicates the Health of the Economy:

The growth and size factor of the GNP indicate the stability  of a country’s economy.

Explain the Direction of Economy:

The GNP is also helpful as it reveals the direction of a country’s economy. It tells the economist what the economy of the nation is upto.

What are the drawbacks of the GNP?

The GNP has more limitations than advantages. Given below is the limitations of the Gross National Product (GNP) along with the detailed description:

Doesn’t consider a number of services:

In several economies, services such as entertainment, transportation, laundry, and teaching are not considered while considering the GNP. This is one of the most severe drawbacks of the GNP as these services have a noticeable contribution in deciding the economic factor of a country.

Inflation enhances the value:

While calculating the GNP, inflation enhances the measured value of the GNP. In a few cases, the net output value remained unchanged, and still changes are noticed in the GNP results.

Consider the unemployed activities too:

The GNP considers the overall activity of all the citizens, some citizens such as housewives and students don’t perform any monetary activities. Thus, taking them into consideration is a negative and controversial point of the GNP.

Self-consumption amount is not included:

All individuals or consumers hold a specific amount of their produce for self-consumption. This factor sometimes really charges a large amount, but is still not considered in the calculation of the GNP. This is once again a basic structural drawback of the GNP.

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Fails to incorporate quality changes:

Due to differences in the demand and supply phenomenon, the GNP fails to present reports on the quality changes. It over-estimates economic welfare of the people.

Inflate commodity taxes:

The structure of the GNP inflates commodity taxes.

Manipulated income per capita:

The Gross National Product (GNP) exaggerates the income per capita by showing a rise in normal incomes.

The Gross National Product or GDP is a fiscal term. But it has more demerits when compared to merits. Many countries such as the US have already replaced the GNP with the GDP. Many changes are needed to strengthen the status of the GNP in the globe. 

Depending on the GNP for long periods the composition of national output changes drastically. Also, calculating the net foreign income is not a worthy thing. And overall GDP is much better in calculating the country’s economic status.