The case for GDP versus GNP

– the need for new measures of progress

In previous writings, it was highlighted by this author that GDP is not a prudent measure of economic progress and the need to develop a new metric to measure economic growth and development. Since these contentions were put forward, academic debates are now surfacing by key politicians and economists of regional financial institutions on the need to move from GDP as an economic measure to GNP – against the backdrop of Guyana becoming an oil production country soon. This article attempts to build on these contentions to highlight the difference between the two measures and why it will now become ever more important to adopt GNP to aid better decision making and the pursuit of more prudent economic policies.
Since its creation, economists who are familiar with GDP and SNA methodology have emphasised that GDP is a measure of economic activity, not economic well-being. In 1934, Simon Kuznets, the chief architect of the United States national accounting system, cautioned against equating GDP growth with economic or social well-being. The US Bureau of Economic Analysis’ description of GDP states the purpose of measuring GDP is to answer questions such as “how fast is the economy growing?”, “what is the pattern of spending on goods and services?”, “what per cent of the increase in production is due to inflation?”, and “how much of the income produced is being used for consumption as opposed to investment or savings?” (McCulla and Smith 2007). To understand how GDP continues to be misused as a scorecard for national well-being, it is important to consider how the current system has evolved. It is also important to recognise that GDP is not inherently bad—it measures what it measures. Rather, it is being misused as an indicator of something it doesn’t measure and was never intended to measure.
Gross national product (GNP), on the other hand, measures the total of all business production and service sector industries in a country, plus its gains on overseas investments. The computation of GNP also subtracts the capital gains of foreign companies or foreign nationals earned domestically. Through the GNP measure, therefore, a more accurate portrait of the economy can be analysed and studied for trends since GNP calculates the total incomes of all nationals of a country, earned both domestically and abroad. This gives a far more realistic picture than the income of foreign nationals in the country as it is more reliable and permanent in nature. GNP can also be calculated on a per capita basis to demonstrate the consumer buying power of an individual from a particular country, and an estimate of average wealth, wages, and ownership distribution in a society.
At the time it was conceived, GDP was a useful signpost on the path to a better world: a path where increased economic activity provided jobs, income, and basic amenities to reduce worldwide social conflict and prevent a third world war. That economic activity has created a world very different from the one faced by the world leaders who convened at Bretton Woods in 1944. We are now living in a world overflowing with people and manmade capital, where the emphasis on growing GDP and economic activity is leading the world back toward the brink of collapse. As Herman Daly said recently:
“Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly” (Daly 2008).The world financial system is in crisis, partly as a result of overemphasis on material growth at all costs and a neglect of real and balanced development. Now, the world is in need of new goals and new ways to measure progress towards those goals. There is a need for a global dialogue and consensus on these issues.
Scholars have argued that the time is right to embark on a new round of consensus-building processes that will re-envision what was institutionalised over the last 65 years. The need is clear for:
(1) New goals with a broader view of interconnectedness among long-term, sustainable economic, social, and ecological well-being
(2) Better ways to measure progress towards these goals
(3) An invigorated campaign for the realisation of this evolved economic system with new institutions