The different methods for the computation of GNP
Measurement of National Product and Income
There has been vast development in the field of measurement of product and income after the publication of Keynes’ The General Theory. As a result, the modern techniques of national income and product estimation are much more detailed, extensive, statistically accurate and based on empirical research. We shall now proceed to study the measurement of various product and income aggregates in a country.
Gross National Product (GNP): GNP is the most well-known and widely used national product or income measure for the estimation of the economic performance of an economy. Gross national product is defined as the aggregate market value of all the final goods and services produced by the economy during a specific income period which is normally one calendar year.
GNP may be determined by the following methods: (i) Product Method: In this method, the quantities of all final products and services turned out during a given year are multiplied by their respective prices. The sum of market value of final products and services provides a measure of the gross national product at current or market prices in that years. If Q₁, Q, QQ are the quantities of n final products and their respective prices are P., PPP the GNP is determined as GNP PQ+PQ+P,Q, +P.Q. or GNP-PQ-(X-M)
Gross Domestic Product (GDP): Gross Domestic Product (GDP) at market prices can be estimated by deducting the net exports (X-M) from the GNP
GDP at Market Prices = GNP at Market Prices – Net Exports
(X-M) may be positive or negative. The product method has some deficiencies
(i) The choice between final and intermediate products is sometimes quite difficult.
(ii) In certain economic activities like trade, transport, banking, insurance etc., the products are not generated. The application of this method in those sectors poses some problems.
(iii) It is necessary to make a distinction between the final and intermediate products, otherwise the problem of double or multiple country will arise.
(iv) This estimate is greatly affected by the market prices.
(v) This estimate does not include services. variation in current or
(vi) In this estimate, that part of production which is retained for self consumption is also not included.
(vii) The measurement of GDP is also complicated by the non-productive activities such as the services rendered by housewife to the members of the household without any remuneration.
(ii) Value Added Method: As an aggregate of value added, GDP takes into account the difference between the value of the goods the firms buy and the value of the goods the firms sell. Suppose the steel industry buys iron worth Rs. 20 corers and turns out the output of steel products worth Rs. 50 crores, the value added by this industry is of the order of Rs. 30 crores. The sum of the values added by all the firms and industries in the economy aggregated with the values of primary products will always equal the value of the output of the final goods within the domestic territory. GDP Values of All Primary Products +All Values Added GDP at Market Prices or Gross Value Added at Market Prices – Aggregate Sales – Intermediate Purchases GNP at Market Prices Gross Value Added at Market Prices + Net Export (X-M) This method for measuring GDP or GNP makes improvement upon earlier product method in two important respects:
(1) There is no need of making distinction between final and intermediate products for removing double counting.
(ii) Through this method, it is possible to quantity the contribution of primary, secondary and tertiary sectors to the total product every year.
This method however, involves some problems:
(i) It requires detailed data related to production, sales and purchases.
Such statistics are not easily available in less developed countries.
(ii) In several irrigation and power projects, it is difficult to measure exactly the value added..
(iii) It is not easy to have exact measurement of value added in several public services like education, health, police, defense services and administrative services.
(iv) Many industries turn out more than one product. The exact estimation of value added in their case is also very difficult.
(iii) Expenditure Method: As an expenditure aggregate, GNP represents the aggregate purchases of final commodities and services by the consumers and the government plus gross private domestic investment plus net foreign investment.
GNP C+G+I+(X-M)+D=GNE
Here C is consumer purchases or consumption expenditure, G is Government expenditure, I is Net private domestic investment, (X-M) is Net foreign balance and D is Depreciation. The sum of I and D measures gross private domestic investment. GNE is the gross national expenditure which is identically equal to GNP.
GDP can be computed through the expenditure approach by deducting (X-M) out of the GNP
GDP GNP (X-M)
GDP=C+I+G+D
This method for estimating the GNP involves some serious difficulties:
(i) Accurate statistics related to consumption expenditure are often not available.
(ii) The exact data concerning investment, depreciation etc. are not available in poor countries.
(iii) People generally tend to overstate of gross national income over its true level.
(iv) Some services of government assist production. Some other services are meant for peace and security. In this respect, it is difficult to make a clear distinction which of them should be included in national income and which should be remain excluded from it.
(v) The problem is created by the transfer payments made by the government such as pensions, unemployment allowances etc.
(vi) In the case of durable consumer goods like house, TV set, car, furniture etc. expenditure is incurred once but their use is extended over series of periods. This also creates complication in the measurement of domestic and national product.
(iv) Incomes method: As an income aggregate, GNP is equivalent to the total income created by the current productive activity and the allocations of this income among the various economic groups in the community such as workers, land owners, capitalists and organizers in the form of wages, rents, interests and profits. The sum of these factor incomes generated within the domestic territory of the country is termed as domestic factor income.
GNP at Market Prices =All wages, salaries and supplementary incomes (excluding transfer payments) + All rents including imputed rents on self occupied properties + All interests + All profits + Net Income from abroad – Transfer Payments + Indirect Taxes – Subsidies + Depreciation
GDP at market prices can be computed by deducting Net factor income from abroad out of the above aggregate
GDP at Market Prices Domestic Factor Incomes – Transfer Payments + Indirect Taxes – Subsidies + Depreciation.
This method involves some difficulties which are as :
(i) A part of production is retained by the producer for the consumption by his family. It is not brought into the market for sale. It does not generate money income. This creates problem in exact estimation of incomes of the producers.
(ii) Incomes of self-employed people include the elements or wages, rents, interests, profits etc. Such incomes are called mixed incomes. Sometimes it is quite difficult to make correct estimates of such incomes.
(iii) If a part of wages is paid out to the workers in kind, the exact measurement of wages and salaries becomes difficult.
(iv) In the case of self-occupied properties by the owners, no direct rental payments take place. That creates problem in the estimation of total rents.
(v) Some activities do not directly generate income, they rather create products. In such a situation, this method is difficult to be applied.
(vi) Some people don’t disclose their whole income for tax reasons. That results in the under-estimation of GNP.
The alternative approaches in the measurement of GNP lead to identical conclusion. The aggregate expenditure by the community in a particular year is incurred on the purchase of goods and services. Therefore the aggregate expenditure for all practical purpose may be equal to the value of the final products. Further aggregate expenditure remains identically equal to the aggregate income.
GNP Sum of the value of final products
GNP = Sum of all expenditures
GNP = Sum of all values added
GNP Sum of all factor incomes
GNP= Aggregate value of final products
= Aggregate of all values added
= Aggregate of all expenditures
= Aggregate of all factor incomes
In fact no single method for the measurement of national income and product is sufficient. The product method is applicable to those sectors alone which turn out products. Income and expenditure methods similarly are deficient because of widespread tendencies among the people to understate their incomes or exaggerate their spending. In countries like India, the statistical gaps too limit the use of these methods for the measurement of national income and product. To overcome these practical difficulties and to verify the accuracy of estimates, two or more of the these methods are combined to have an accurate estimate of national income and product.
The National Income Committee (NIC) in India makes use of the combination of product and income approaches. In the revised series related to national income accounting in India published by the Central Statistical Organization (C.S.O) in September 1999, the whole economy has been divided into 14 sectors. The product method is used in agriculture, forestry, logging, fishing, mining and quarrying registered manufacturing sectors. Income method is used in unregistered manufacturing, electricity, gas and water supply, transport and communications, trade, storage, hotels and restaurants, banking and insurance, real estates and ownership of dwellings. public administration and defense and other services. In the construction sector, commodity flow method is used in urban are and expenditure method in rural areas.
