How to use Gross National Product as a Economy Indicator

Gross National Product (GNP) is an index which calculates economic growth. While Gross Domestic Product (GDP) is the sum total of goods produced and purchased in a county and the value of services in a given time period, Gross National Product is calculated by adding together the market value of these outputs.

It is often argued that the GNP is misleading and has some limitations as an indicator to measure economic growth or a country's wealth. It suffers from some limitations and hence while using GNP one must keep in mind such limitations which may result in wrong figures. The below article will help you understand how to use Gross national product while calculating the final value.

Following are some important points to be kept in mind about the input data.

  • Final value of goods and services are used in case of calculation of GNP which is produced in a country. For example. Cotton is used to make thread, this cotton is sold to the thread producer; further this thread is sold to weavers who weave the cloth. This cloth is sold to the cloth merchant who sells it ahead to the manufacturer of garments and finally the garment is sold to the consumer. Therefore the cost at which the garment is sold should be taken into consideration. Hence the final value of the product is counted in Gross National Product and not the values at various stages to avoid double counting.
  • The value of output which is produced is used in GNP. Hence, it does not take into consideration any second hand goods such as used cars and resale of houses.

Difference between GDP and GNP

GDP and GNP are very closely related to each other. However, they are different in some aspects. Gross National Product is the final value of domestically produced goods and services while Gross Domestic Product is the final value of goods and service which is produced within a country's borders.

Nominal Gross National Product takes into consideration the accumulated value of all output which is produced by using prices of the current year. For example GNP for year 2000 will use the price level of year 2000s; on the other hand the nominal GNP for year 2012 will take into consideration the price level of 2012 only. There happens to be a difference in both these GNP since the price index used is different. This difference in GNP between these two indexes is the level of inflation.

Supply and Demand

Demand and supply mechanism plays a very important role. Gross National Product measures the total supply of goods and services produced in a definite time period and it should be equal to the total demand. This means that savings are assumed to be zero and other things being constant.

GNP = C + G + I + NX +NFP

The calculation is explained below:

  • Consumption (C) is the total consumption by a household. It consists of the entire consumer spending such as food, clothing etc. The major component of GNP is consumers' consumption which forms 2/3rd of total consumers demand.
  • Goods and services (G) also forms a large part of the GNP after consumers' consumption. Government purchases consist of expenses incurred by the government in the form of salaries for employees, Defence and spending by state and local government for maintenance of infrastructure etc. One very important thing which should be kept in mind is transfer payments made by the Government such as unemployment compensation should not be included.
  • Investment spending (I) consists of spending which is made by businesses in order to keep it running and to increase its productivity. Investment spending should not be confused with purchase and sale of stocks and bonds. Investment which goes in construction of houses and building should also not be a part of the Gross National Product.
  • The net exports (NX) refer to net exports that are the total exports minus imports. Exports are goods which a country sells to the rest of the world and imports are goods which a country purchases for rest of the world. If the imports are more than exports the net exports are negative resulting in trade deficit and if the exports are more than imports then there is a positive net exports resulting in trade surplus. A trade deficit reduces a country's GNP and is not a healthy sign for an economy and on the other hand trade surplus results in positive gross national product and is a healthy sign for an economy.
  • Net factor payments (NFP) refer to the total amount of payments that a country pays to the rest of the world for inputs used in production of goods and services minus the payment received from the rest of the world for providing with inputs for their production of goods and services.

Breaking the Gross National Product measuring stick

Gross National Product is used to measure the overall welfare of the country thereby measuring the actual and final production. An increase in GNP is a healthy sign for the economy which strives to attain a high GNP figure. In spite of this Gross National Product is not the most sought after figure to calculate the welfare of an economy since it has its limitations. Economic output is not easily calculated since the improvement in living standard and efficiency in productivity is a very difficult component to calculate. A very well explained example is that of a personal computer. The prices of computer have drastically dropped but its utilities have increased at a steady rate. Continuous efforts by statisticians and economist have shown very less results in overcoming this limitation of Gross National Product. It is not an easy task to deal with such limitations and the result often is not too precise and is misleading. There are few products which are produced and sold in an inactive market or sold as barter trade and therefore creates confusions. Many activities such as youth who works as volunteers and stay at home mom also add to the nation's welfare but their contribution to the economy is often disregarded and is not counted in the calculation of the country's Gross National Product. These activities are not prevalent in an active market and are not influenced by the factors of demand and supply. These activities are not sold and brought in the market and hence are not added in GNP. This is a significant loss in the figure.

Another major expenditure which is incurred on relief activities such as disaster management again for welfare benefits but do not add to any productivity of the economy. For example, in case of Japan earthquake where millions of dollars were spent in relief purpose but it does not add any value of the economy but is incurred to get the economy to the original state. Consumers and investment spending is used up in addition of C and I in order to calculate the Gross national product. Government spending also increase because government spends money for relief purposes but there is not progress in the economy in fact the welfare of the economy decreases in such disasters.

There are several other things which do not depict the true picture such as leisure time. Leisure time also adds to the well being of a person and hence the economy. But this does not add to the well being of the economy. In fact the irony is that when an economy gets rich people get more leisure time. Therefore the gap between both Gross National Product and nations well being gets wider which is contrary to the definition of GNP.

Gross National Product may be a measure of a nation's well being but unfortunately does not take into account charity work and cost associated with relief activities which are used in order to reconstruct the economy. If these limitations are taken care of then it can be used to measure the nation's economic activity as well. Therefore GDP and GNP both should be taken into consideration while measuring economic growth and measuring economic welfare.

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