A Glossary of Political Economy Terms

how is gdp different from gnp

Gross National Product (GNP)

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 country's residents. ("Final" goods and services means goods and services sold or otherwise provided to their final consumers -- that is, to avoid double counting, the value of steel sold to GM to make a car is not added separately into the GNP or GDP totals because its value is already included when we add in the final sales price of the car to the customer.)

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 country's borders and there may be companies owned by the country's 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.

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. (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.)

Why does anyone bother to estimate the GNP or GDP. For the same reasons statistical data is also gathered on unemployment rates. consumer price levels, the international trade balance and so on -- to facilitate economic policy making by government, to assist in planning by decision-makers in private business, and to test economic theories. If government policy makers include among their goals the promotion of economic growth and material prosperity in the national economy as a whole by means of monetary and fiscal policy, they need to have some reasonably precise way of telling how the economy is doing so as to decide whether they should be pushing on the gas or stepping on the brakes. Businessmen responsible for planning new investments in plant and equipment or the introduction of new products can use macroeconomic data and economic theory to forecast the likely levels of demand for their products and the probable trends in their various costs of production. Finally, a historical record of such statistics provides economists with the necessary data to test and refine their theories about how the economy actually works (and, in the process, perhaps to improve the policy makers' understanding of the likely consequences of their policies).

GNP and GDP are among the most comprehensive measures of the overall amount of economic production taking place in a national economy. Nevertheless, 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.

A very large category of privately produced goods and services whose production does not register at all in the official GNP or GDP statistics (because they do not trade for money on the market) consists of householders' home production for their own use -- things like backyard vegetable gardening, do-it-yourself home and auto repairs, and the innumerable productive service activities of homemakers in cooking, cleaning, sewing, childcare and so on. Another major omission from the national accounts consists of goods and services that actually are traded for money on markets -- black markets -- but the transactions are deliberately concealed from government information collectors, either to avoid prosecution for trading in illegal demerit goods (for example, drugs and prostitution) or simply to avoid paying taxes or submitting to costly regulations on otherwise potentially legal business transactions (working off the books, unauthorized import/export trade, "moonshine" production of liquor, etc.). Economists' unofficial estimates of the size of the American "underground economy" in recent years range from no less than 5% to as much as 30% of official GDP !)

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 (or GDP ) 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.

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 today's 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 (as the advocates of the "equitable distribution" and merit goods and demerit goods concepts would want to insist upon as crucial determinants of societal welfare).

Source: www.auburn.edu

Category: Bank

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