“Output” Gross Domestic Product, or GDP Output figures are rarely ‘manufactured’

Question

“Output”

Gross Domestic Product, or GDP

Output figures are rarely ‘manufactured’ blatantly, even in socialist countries, except in the most extreme political situations – such as the early days of Stalin’s rule or the Great Leap Forward under Mao Zedong in China. Still, it would be wrong to think that we can measure economic output, or any other number in economics for that matter, in the way we measure things in natural sciences, such as physics or chemistry.

The economists’ favoured measure for output is Gross Domestic Product, or GDP. It is, roughly speaking, the total monetary value of what has been produced within a country over a particular period of time – usually a year, but also a quarter (three months) or even a month.

I said ‘roughly’, because ‘what has been produced’ needs definition. In calculating GDP, we measure output – or product – by value added. Value added is the value of a producer’s output minus the intermediate inputs it has used. A bakery may earn £ 150,000 a year by selling bread and pastries, but if it has paid £ 100,000 in order to buy various intermediate inputs – raw materials (e.g., flour, butter, eggs, sugar), fuel, electricity and so on – it has only added £ 50,000 of value to those inputs.

If we didn’t take away the value of the intermediate inputs and simply added up the final outputs of all the producers, we would be double-, triple-and multiple-counting some components, inflating the actual output. The baker bought its flour from a milling company, so if we simply added up the output of the baker and the miller, the flour that the baker bought would be counted twice. The miller bought the wheat from a farmer, so if we added the output of the wheat farmer to those of the baker and the miller, the portion of the wheat output that the farmer had sold to the miller and then was sold on to the baker would be counted three times. Only by counting the ‘added’ value can we measure the true size of the output.

What about the ‘Gross’ bit in GDP? It means that we still have not taken away something that could have been removed from the picture, as when a can of tuna specifies gross weight and net weight (that is, the weight of the fish without the oil or brine). In this case, that something is the used-up parts of capital goods – basically machines, so we are talking the baker’s ovens, dough mixers and bread slicers. Capital goods, or machines, are not ‘consumed’ and incorporated into the output in the same way in which flour is to bread, but they experience reduction in economic value with use – this is known as depreciation. If we take away the wear and tear of machines from GDP, we get Net Domestic Product, or NDP.

Net Domestic Product, or NDP

As NDP accounts for everything that has gone into producing the output – intermediate inputs and capital-goods inputs – it provides a more accurate picture of what the economy has produced than GDP does. But we tend to use GDP instead of NDP because there is no one agreed way of estimating depreciation (suffice it to say here there are several contending ways), which makes the definition of N in NDP quite tricky. Then how about D in GDP? ‘Domestic’ here means being within the boundary of a country. Not all producers in a country are its own citizens or companies registered in it. Seen from the other side, not all producers produce in their home countries; companies run factories abroad, and people get jobs in foreign countries. The number that measures all the output produced by your nationals (including companies), rather than the output produced within your border, is called Gross National Product, or GNP.

Gross National Product, or GNP

In the US or Norway, GDP and GNP are more or less identical. In Canada, Brazil and India, with many foreign firms inside their borders and few domestic firms producing abroad, GDP could be more than 10 per cent bigger than GNP. For Sweden and Switzerland, which have more of their national firms operating abroad than foreign firms operating within their borders, GNP is bigger than GDP, around 2.5 and 5 per cent respectively as of 2010.

In the US or Norway, GDP and GNP are more or less identical. In Canada, Brazil and India, with many foreign firms inside their borders and few domestic firms producing abroad, GDP could be more than 10 per cent bigger than GNP. For Sweden and Switzerland, which have more of their national firms operating abroad than foreign firms operating within their borders, GNP is bigger than GDP, around 2.5 and 5 per cent respectively as of 2010.

GDP is more frequently used than GNP, since, in the short run, it is the more accurate indicator of the level of productive activities within a country. But GNP is a better measure of an economy’s long-term strength. A country may have a higher GDP (GNP) than another, but that may be because it has a larger population than the other. So, we really need to look at GDP or GNP figures per capita (per head, or per person, if you like) if we want to know how productive the economy is – it is actually somewhat more complicated than that, but we can leave this aside; if you are interested, read the footnote.

Limitations of GDP and GNP measures

A critical limitation of GDP and GNP measures is that they value outputs at market prices. Since a lot of economic activities occur outside the market, the values of their outputs need to be somehow calculated – ‘imputed’ is the technical word. For example, a lot of farmers in developing countries engage in subsistence farming in which they consume most of the food they produce. So we need to estimate that quantity and impute market values to what those farmers produced but did not sell in the market (and consumed themselves). Or, when people live in houses they own, we impute the value of the ‘dwelling services’ involved, as if the house-owners are paying the rents at market rates to themselves. Unlike outputs exchanged through markets, the imputation of market values to non-marketed outputs involves guesswork, imparting inaccuracy to the numbers.

Worse, there is a particular class of non-marketed output whose value isn’t even imputed. Household work – including cooking, cleaning, care work for children and elderly relatives and so on – is simply not counted as part of GDP or GNP. The classic ‘joke’ among economists is that you reduce your national output if you marry your housekeeper. The standard excuse is that it is difficult to impute values to household work, but it is a very weak defence. After all, we impute values to all sorts of other non-marketed economic activities, including living in one’s own house. As the vast bulk of household work is done by women, women’s work is grossly under-valued as a result of this practice. Many estimates put the value of household work to be equivalent to around 30 per cent of GDP.

Please summarize and analyze (minimum 500 words)

Explanation / Answer

GNP or Gross National Product is the money value of all the final goods and services produced by a nation or country irrespective of its geographical boundaries. It include net factor income from domestic as well as abroad. Whereas GDP or Gross Domestic Product is the money value of all the goods and services produced within the domestic territory of a country, thus we can say that GNP is wider phenomena than GDP. The relationship between them can be presented by the equation:-

GNP = GDP + NFIA, Where NFIA is Net Factor Income From Abroad, It can be positive or negative based upon trade.

Now whenever we buy a product, for eg:- a cellphone, its money value will decrease with respect to lapse of time, wear and tear etc. this reduction in its money value is called as depriciation, so GDP is the Gross Domestic Product, means it is an abstract term, when we substract the rate of depriciation we get Net Domestic Product or NDP. The relationship can be more clear by the following equation:-

NDP = GDP - Depriciation

Similarly we also obtain, NNP i.e Net National Product

NNP = GNP - Depriciation

so, in this way we define this economic terms, now the question is why we can't often come across NDP and NNP for measuring economic growth, the answer to this question is they are not used often because there is no specific criteria to measure the depriciation of all the goods and services in a market. Rate of depriciation vary from product to product.

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