UPSC Express

Gross domestic product (GNP):

Gross domestic product (GDP) is the total value of all the finished goods and services produced within a country’s borders in a specific time period.

Gross national product (GNP):

Gross national product (GNP) is the total value of all the final products and services produced in a given period by the means of production owned by a country’s residents. The basis for calculating the GDP is the location, whereas GNP is based on citizenship.

While GDP is often seen as an indicator of economic well-being, a high GDP per Capita need not necessarily mean a high average standard of living or well-being. GDP has inherent limitations in what it represents.

Limitations of GDP:

• GDP also includes activities with negative externalities, particularly environmental ones, among others. For example, smoking.
• GDP also includes expenditures that contribute positively to the GDP, but they clearly do not contribute to social well-being. For example, military related expenditure.
• A country with wide disparities in income could appear more progressive, strictly using GDP, than a country where the income disparities were significantly lower.
• The existence of a large hidden economy may make comparisons based on GDP very misleading.
• It does not account for productive non market activities, for example, the services of a mother to her children. Also, GDP does not include a meaningful part of the economy – household work.
• Certain destructive events or activities can increase GDP while decreasing overall welfare, making the GDP an inaccurate gauge of social welfare. A massive hailstorm that creates demand for thousands of new roofs and windows in a particular region, for example, is not an economically beneficial event.

As researchers including Amartya Sen pointed out, human (or social) well-being does not depend solely on commodities (as captured by the GDP statistics), but on the capability of people to actually use them in a way they wish to.

Given all the limitations of GDP as measures of welfare, it is clear that the practice of (implicitly or explicitly) using GDP statistics as a welfare proxy is flawed.  However, for now, it remains the main indicator of development due to its relative ease of measurement and comparison.