Gross National Product and Environment Essay ⋆ Environment Essay Examples ⋆ EssayEmpire

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Gross National Product (GNP) is one of the most comprehensive measures of the overall amount of economic production taking place in a national economy. The first set of national accounts, prepared under Simon Kuznets, Nobel Prize Laureate in Economics, was presented to the United States in 1937. Kuznets helped the U.S. Department of Commerce to standardize the measurement of GNP.

Since World War II, GNP has been regarded as the most important indicator of the status of an economy. GNP is the sum of the different kinds of earnings permanent residents receive in a given country, plus any income earned by residents from investments abroad such as profits, interests, and royalties. While Gross Domestic Product (GDP) measures economic activity within a country’s borders, the GNP measures the total income of a country’s population. It adds rents, interest, and profits and dividends flowing into the country to GDP, while deducting rents, interests, and profits and dividends paid out to foreigners. At present, GDP is preferred to GNP because policy makers are usually interested in the level of economic activity within a country’s borders. In most cases, GDP and GNP are approximately equivalent, although for some countries with a large foreign presence, such as Ireland, GNP is the preferred measure.

GNP in economics is a quantitative measure to assess a country’s total economic activity. The GNP equals the GDP plus income earned by domestic residents through foreign investments, minus the income earned by foreign investors in the domestic market. GNP at current market prices is equal to gross national product at factor cost plus taxes on expenditure less subsidies. It represents the total expenditure on the output of goods and services of the national economy valued at the prices at which the expenditures are incurred. The expenditure is made up of personal expenditure on consumers’ goods and services, net expenditure by central and local government on current goods and services, gross domestic physical capital formation (comprising fixed capital and stocks), and net expenditure by the rest of the world on goods and services originating in a given country, plus net factor income from the rest of the world. Economic and political life revolves around the GNP.

Limitations of GNP

The GNP system has three main limitations. First, if there is no transaction, it doesn’t affect the overall economy (GNP excludes nonmarket activities). All nonmarket activities are based on production and consumption that occur outside the market economy. Volunteer work and child care are two contributors to the economy that are not included in the GNP. Second, if there is no money involved, GNP is not concerned. Nonfinancial transactions receive no credit within the GNP system because the GNP is a measure of the movement of money through a national economy. For example, grandparents are the second largest group of child care providers, but their contribution receives no recognition within the GNP calculation, because they do not receive payment for their effort. Third, there are no value judgments on the market transactions. The GNP is simply a measure of financial transactions; it makes no value judgment on whether the transactions were socially useful. Crime and car accidents increase the GNP because of increased work for police, ambulances, and prisons. A reduction in crime reduces the GNP. The GNP contains no information about justice or social capital. Other limitations are that greater access to knowledge, better nutrition and health services, security against crime and physical violence, political and cultural freedoms, and so on are not fully captivated in the GNP.

As a specific measure of economic performance relative to the environment, the GNP is an especially poor indicator. Growth in GNP cannot in any way measure the concomitant impact that increased economic activity may have on the environment. Ironically, disasters such as bushfires, earthquakes, volcanoes, floods, and snowstorms boost the GNP, by driving expenditures for recovery and management. The GNP measures environmental damage only if people pay to clean it up. High levels of waste (or “throughput”) in the economy, where consumers dispose of still-useful goods (washing machines, cars, etc.) to purchase new models also boosts the GNP, while actually representing poor ecological efficiencies. In many societies, the GNP is increasing while the condition of the environment is deteriorating.

While the GNP concept has many limitations, at the time of its creation, it was a major breakthrough in the development of system of national accounting. It has since enabled economic comparisons to be made between countries, and allowed governments and individuals to think more globally in an efficient way. Efforts to develop more robust “green” indicators for national income accounting are ongoing, however. By folding in measures of efficiency, deforestation, human development, or carbon production, alternative economic indicators in the future may better capture the trade offs between economic growth and environmental protection. Until then, GNP must be used with caution as an indicator of progress.

Bibliography:

V. Anderson, Alternative Economic Indicators (Routledge, 1991);
W. England and J.M. Harris, “Alternatives to Gross National Product: A Critical Survey” in Frank Ackerman et al., eds., Human Well-Being and Economic Goals (Island Press, 1997);
Christian Leipert, “A Critical Appraisal of Gross National Product: The Measurement of Net National Welfare and Environmental Accounting,” Journal of Economic Issues (v.21, 1987).