GDP

 Gross Domestic Product, or GDP, is the total market value of all goods and services
produced by a country in a specific time period, typically a year. This includes earnings
from foreign investments.
 Consumption includes things like durable goods – items expected to last more than three
years, like cars, electronics, and toys – and nondurable goods like food and clothing.
 Government expenditures is a fancy term for things like roads, schools, and defense.
 Investment spending is divided into nonresidential (equipment, plants) and residential
(single or multi-family homes), as well as business inventories.
 Net exports means exports that are added to GDP, and imports that are deducted from
GDP.

GNP

 (GNP), an expression used to measure economic growth and wealth, is often misleading
because of its limitations. There are certain situations when using GNP is useful, but
if used improperly it can confuse and deceive. In this article, we'll show you how to
properly read the GNP map, to make sure you arrive at your data destination safely.

 GNP includes the aggregate value of goods, such as cars, houses, food and drinks, as
well as the value of services such as legal and medical fees that are produced and
purchased by a nation during a given time period. The market value of these outputs is
added together to calculate GNP.

HDI- Human Development Index

 The HDI was created to emphasize that people and their capabilities should be the
ultimate criteria for assessing the development of a country, not economic growth alone.
The HDI can also be used to question national policy choices, asking how two countries
with the same level of GNI per capita can end up with different human development
outcomes. These contrasts can stimulate debate about government policy priorities.

 The Human Development Index (HDI) was developed by the United Nations as a metric
to assess the social and economic development levels of countries. Four principal areas of
examination are used to rank countries: mean years of schooling, expected years of
schooling, life expectancy at birth and gross national income per capita. This index
makes it possible to follow changes in development levels over time and to compare the
development levels of different countries.

 This index can also be used to examine the various policy choices of nations; if, for
example, two countries have approximately the same gross national income (GNI) per
capita, then it can help to evaluate why they produce widely disparate human
development outcomes. One goal of the proponents of the HDI is to stimulate public
policy debate.
 
The computed HDI of a country is a geometric mean of normalized indexes of each of the
life aspects that are examined – knowledge and understanding, a long and healthy life,
and an acceptable standard of living.
 The health aspect of the HDI is measured by the life expectancy, as calculated at time of
birth, in each country. Education is measured on two levels: the mean years of schooling
for residents of a country and the expected years of schooling that a child has at the
average age for starting school. The metric chosen to represent standard of living is GNI
per capita based on purchasing power parity (PPP), a common metric used to reflect
average income.

Physical Quality of Life Index

 National income and per capita income as the indicators of development have many
limitations. So economists have tried to measure development in terms of social
indicators which emphasize the quality of life instead of quantitative aspect emphasized
by GNP or GNP per capita.

 These include availability of food and nutrition to the people, health care facilities, level
of literacy and education, environment, work leisure ratio and conditions of work etc.

 It is not possible to include all the determinants of welfare in the constructions of quality
of life index because many of these variables involve value judgements. It is therefore
said that certain selected social indicators be combined together with due weight assigned
to determine the quality of life index.

 Thus, quality of life index is a composite criterion consisting of certain selected social
indicators to measure the standard of living (welfare) of the people. D. Morris uses only
three items to construct a “Physical Quality of Life Index” (PQLI) relating to 23
developed and developing countries of the world for a comparative study.
These indicators are:
(i) Life Expectancy at birth

(ii) Infant mortality rate

(iii) Literacy rate

After normalising these three indicators Morris suggested to take a simple arithmetic mean of the
three indicators to construct what is called the Physical Quality of Life Index (PQLI). Similarly
Human Development Index (HDI) has been prepared under United National Development
Programme which is an attempt to measure the quality of life.
Three Economic Indicators of Development

 Gross Domestic Product (GDP) is the total economic value of goods and services
(expressed in US dollars) produced within the borders of a country in the course of a year
and available for consumption in the market place.

 Gross National Product (GNP) is the same but includes the value of all services
produced at home and abroad. A country such as Ghana will have a relatively similar
GDP to GNP because it doesn’t have many companies which produce things abroad:
most production takes place within Ghana. America, on the other hand, which is where
many Transnational Corporations are based, has a much higher GNP than GDP – Think
about MacDonald’s for example –all of those Big Macs sold outside of the USA won’t
appear in the GDP of the USA but will appear in the GNP.

 Gross National Income (GNI) a hideous oversimplification of this is that it’s ‘Gross
Domestic Product + the additional income that self-employed people pay themselves
+income received from abroad’. This matters to a lot of developing countries who don’t
produce much but have large diasporas, or populations living permanently abroad. Take
Gambia for example (the country Paul Mendy takes your old toys to at Christmas) – 1/6th
of its GNI is from money sent by relatives who abroad, this would not be included in
either GDP or GNP.

Two further important terms – ‘Per Capita’ and ‘Purchasing Power Parity’

 Gross National Product Per Capita – GDP/ GNP are often divided by the total
population of a country in order to provide a figure per head of population, known as
GDP/ GNP per capita.
 The cost of living varies in different countries – so one dollar will buy you a lot more rice
in India than it would in America. Purchasing Power Parity figures for GNI per capita
factor in the cost of living which is useful as it gives you more of an idea of the actual
standard of living in that country for the average person.

Gross National Income Per Capita

This section provides a closer look different levels of ‘development’ according to this particular
economic indicator. Remember, global rankings will vary depending on whether you use GNI,
GNP, or GDP.

One measurement of development The World Bank uses is Gross National Income (GNI), which
can be crudely defined as the total value of goods and services produced in a country in a year
plus any income from abroad. If you divide GNI by the number of people in the country, you get
the average amount of income per person, or GNI per capita.

GNI per capita is widely regarded as a good indicator of the general standard of living in a
country, and it is a good starting point for giving us an idea of the extent of global inequalities
between countries. For example, the United Kingdom has a GNI per capita of about $43 000,
while India has a GNI per capita of about $1600, which is more than 20 times greater.

Three Advantages of using GDP/ GNP/ GNI as an indicator of development

1. GNI figures provide a snap-shot indication of the huge difference between the more
developed and less developed countries. In 2016, the GNP per capita in the UK was
$43000 while in India it was only $1600. This means that there is 20 times as much
money per person in the UK compared to in India
2. Gross National Income figures are also closely correlated with social development –
generally speaking the higher the GNI per capita, the better the education and health
indicators are in a country.
3. Total GDP figures give us an indication of who the most powerful nations are on earth in
terms of military power. It’s not a perfect correlation, but the USA, China, Russia and the
UK are all in the top ten for GDP and they are the biggest arms producers and consumers
in the world too.

Four limitations of using GDP/ GNP/ GNI as an indicators of development

1. Quality of life (Social Development) may be higher or lower than suggested by GNP per
capita.
2. They don’t tell us about inequalities within countries. The USA has one of the highest
GNPs in the world but some extreme poverty.
3. A lot of production in developing countries may not be included. For
example, subsistence based production is consumed locally in the community, and not
sold in the market place. Similarly goods obtained illegally on the black market are not
included in GNP measurement
4. They are very western concepts, equating production and economic growth with
development. Some countries may not want economic growth and have different goals
(Bhutan)
5. 1.2.1 Using GDP or GNP as a measure of development
6. As you will recall from your previous courses in basic economics, Gross Domestic
Product (GDP) and Gross National Product (GNP) are measures of economic activity.
While GDP measures economic activity within a country’s borders, the Gross National
Product (GNP) measures the total income (or economic activity) of a country’s citizens.
GNP adds to GDP the income flowing into the country from citizens living abroad, and
subtracts the income earned by foreigners in the country. Since GDP data tend to be used
more often than GNP data (and in any case for most countries GDP is approximately the
same as GNP), the rest of this section shall discuss GDP (although much of the
discussion is equally applicable to GNP).
7. Real GDP per capita is often used as an indicator of a country’s standard of living or
level of development. Despite numerous criticisms, GDP does have some advantages as a
measure of standard of living or development:
8. · GDP growth (as a measure of economic growth) is a major contributor to welfare and
GDP tends to be correlated with several other measures of ‘development’, such as
literacy and healthcare provision.
9. · As currently defined, it has a clear methodology and is relatively easy to calculate.
10. · Since it is a monetary/mathematical/accounting calculation with an established
methodology, it is objective (in contrast, such things as ‘happiness’ and ‘political
freedom’ are subjective and difficult to measure).
11. · It is widely used and all GDP calculations are made using broadly the same
methodology. This facilitates cross-country and over-time comparisons.
12. · Given its long history and standard methodology it is reasonably well-understood by
policy-makers.
13. However, even Dr. Simon Kuznets, Nobel Laureate and producer of the first
comprehensive and systematic measurement of United States GDP, has criticised GDP
and GNP as measures of development:
14. “the welfare of a nation [can] scarcely be inferred from a measure of national
income…”
15. Robert Kennedy has also criticised GNP as a measure of welfare (similar criticisms apply
to GDP):
16. “The gross national product includes air pollution and advertising for cigarettes and
ambulances to clear our highways of carnage. It counts special locks for our doors and
jails for the people who break them. GNP includes the destruction of the redwoods and
the death of Lake Superior. It grows with the production of napalm, and missiles and
nuclear warheads… it does not allow for the health of our families, the quality of their
education, or the joy of their play. It is indifferent to the decency of our factories and the
safety of our streets alike. It does not include the beauty of our poetry or the strength of
our marriages, or the intelligence of our public debate or the integrity of our public
officials. It measures everything, in short, except that which makes life worthwhile.”
17. Perhaps the last sentence is a bit too strong. However, this statement does raise some very
interesting points. The problems to which Robert Kennedy alludes are discussed in more
detail below:
18. 1. GDP does not take into account unpaid work (e.g. in household and undertaken
on a voluntary basis) or activity in the black/informal economy even though these
may contribute positively to the welfare of a society
19. a. An example of something excluded from GDP is the childcare services provided by a
mother to her own children (note the somewhat perverse effect that if the childcare was
provided by a paid-for Nanny/Au Pair then this would be included in GDP).
20. b. The omission of the value of household labour and activities undertaken in the
informal economy are likely to be of greater importance in the GDP data of less-
developed countries, where a larger proportion of economic activity is conducted
informally, illegally or within the household. To gain some idea of the magnitude of the
effect on GDP of omitting activity in the shadow (informal) economy, see Box C.
21. c. There have been some attempts to adjust GDP for the informal economy and for
household and voluntary work. For example, the value of a mother’s childcare service
could be estimated using the average wage rates for paid Nannies/Au Pairs) and then this
could be added to standard GDP. However, it is often very difficult to adjust GDP in this
way – particularly in the case of the informal economy whose exact size is, by definition
not known. Nevertheless, some estimates have been made of the size of the informal
(shadow) economy
22. GDP does not take account of externalities and negative goods:
23. Some examples:
24. a. If a building is burned down and then rebuilt by a private company, GDP increases
while economic well-being is unchanged.
25. b. The costs associated with cleaning up pollution are included in GDP – pollution can
therefore make a country appear better off if in terms of GDP!
26. 3. GDP ignores non-income related dimensions of ‘development’ (e.g. ‘happiness’,
human rights, health, freedom (see other sections))
27. 4. GDP ignores distribution of income
28.

29. As the above diagram shows, simple GDP per capita statistics mask income inequalities
within countries. To take a real-world example, Namibia and Belarus have similar GDP
per capita (approximately US$ 3,000 in 2005). However, inequality in Namibia is much
greater than that in Belarus. In Belarus, the income of the richest 10% of the population is
6.9 times that of the income of the poorest 10% (a relatively low ratio when compared to
other countries), and none of the population lives on less than US$ 1 per day. In contrast,
in Namibia the richest 10% receives 129 times the income of the poorest 10% (one of the
highest ratios in the world) and 35% of the population is living on less than US$1 per
day.
30. Is it fair to say that these countries are equally ‘well off’ (as might be argued from
considering the GDP per capita data alone)?
31. 5. GDP ignores sustainability
32. a. It is possible for two countries to have approximately the same level of GDP but for
them to have different degrees of sustainability. For example, one of them could have
achieved its growth through sustainable forestry practices that support the local
community while the other achieved it through uncontrolled logging and large-scale
mining that pollutes the local water supply. Simple GDP statistics would mask these
important differences, and many people would argue that the former country was in fact
‘better off’, despite its lower GDP.
33. b. GDP calculations treat the depletion of natural resources as current income (e.g.
revenue from logging) and do not take into account the depreciation of the country’s
assets that is involved when trees are cut down.
34. 6. Other issues
35. a. GDP/GNP (and GDP/GNP growth ) should be measured on a per capita basis rather
than in absolute terms, otherwise they could give a misleading impression, especially in
countries with high population and growth. For more information see ‘ Grossly Distorted
Picture’ , The Economist , 13 March 2008.
36. b. In using cross-country comparisons of GDP/GNP as measures of differences in
standards of living, it is preferable to use Purchasing Power Parity (PPP) exchange rates
(see Box E )
37. c. Many developing countries have limited capacity to collect and analyse statistics
properly. Therefore caution should be given when using such data to make inferences or
cross-country comparisons.
38. d. Although other possible measures of ‘development’ (e.g. happiness) are often
criticised for their subjectivity, GDP itself may in some ways be seen to be a subjective
measure: for example GDP calculations make value-judgements that effectively suggest
that household and voluntary work are not important.
Comparison Chart

Basis for
GDP GNP
Comparison

The worth of goods and services The worth of goods and services produced
produced within the geographical limits by the country's citizens irrespective of the
Meaning
of the country is known as Gross geographical location is known as Gross
Domestic Product (GDP). National Product (GNP).

Production of products within the Production of products by the enterprises

Basis Location Citizenship

GDP = Consumption + Investment +

On which scale
productivity is On a local scale On international scale
measured?

Focus on Domestic production Production by nationals

The strength of the country's domestic How the residents are contributing towards
Outlines
economy. the country's economy.

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