One of the most important questions of development politics is what development actually means and how you can measure it. Although nobody will seriously dispute the fact that development has an important political dimension it is usually the economy which is in the focus of multinational organizations as for example the IMF or the Worldbank. The most important indicator for economic prosperity is the Gross Domestic Product (GDP) respectively the GNP which is a close relative. In fact the Worldbank defines developing countries as “countries with low or middle levels of GNP per capita” (Worldbank Glossary). This shows the tremendous importance the GNP has for the work of the Worldbank. In the following essay the value of the GDP as an indicator for development will be assessed. It will be shown that it is a valuable
indicator under certain conditions, but that it is clearly not sufficient to make sound statements about the development of a certain country. In fact it can even be misleading in some respects and dividing between developing and developed countries just on the basis of the GNP is certainly not appropriate. At first I will explain what GDP, GNP and its growth rates actually mean and what they can tell about the economy of a state. The specific advantages of this indicator will be mentioned and the correlations between it and development. Then I will oppose that with the great variety of problems the GDP and similar indicators have. As a conclusion I will show that for a fairly acceptable measurement of development it will be necessary to include some other indicators beside the GDP as well. Development is more than a high level of economic activity it also includes the general standard of living and the degree of personal freedom and
security. The GDP is defined as the value of the final goods and services produced in a country in one year (Mankiw 2001: 522). This value is usually given in US-Dollar and equals the total amount of all sorts of official income and profits and also the sum of the total consumption, investment, government puchases and net exports in a country in a year. The difference between GDP und GNP, the Gross National Product, is that the GNP measures the value which was produced by the citizens of a country, wherever they live and work. That means for example that the profit a British company made in a developing country contributes to the GDP of the developing country but not to its GNP but to the GNP of the United Kingdom.
Table of Contents
1. Importance of GDP / GNP for IMF and Worldbank
2. Concept of the GDP / GNP
2.1 Definition of the GDP, GNP and growth rate
2.2 Advantages of the GDP / GNP
2.3 Preconditions for the use of GDP / GNP
3. Problems of the GNP
3.1 Lack of statistical reliability
3.2 Quality not part of the GNP
3.3 Problem of the shadow economy
3.4 Problematic contributions to GNP
3.5 Unequal distribution of the total income
3.6 Environment not included in GNP
3.7 Immaterial values not included in GNP
4. Improving the measurement of development through further indicators
5. Evaluation of the GNP as an indicator for development
Objectives and Topics
This essay evaluates the validity of the Gross Domestic Product (GDP) and Gross National Product (GNP) as primary indicators for assessing national development, arguing that while they serve as useful economic metrics, they are insufficient and potentially misleading for measuring true societal well-being and progress.
- Correlation between economic output and living standards.
- Limitations of GDP/GNP regarding quality of life, environmental impact, and income inequality.
- Distinctions between economic growth and sustainable human development.
- The necessity of supplementary indicators like the Gini coefficient and Human Development Index (HDI).
Excerpt from the Book
3.6 Environment not included in GNP
Another aspect which is important for sustainable development but not measured by the GNP is the impact of the economy on the environment. Although the need for a sustainable way of dealing with world's resources is a global problem concerning everybody, it is especially a challenge for developing countries. Many developing countries suffer under the fact that their main exports consists of raw materials such as crop, wood or mineral resources. This fact has no direct influence on the GNP but it has major implications for the environment. Extensive agriculture exhausts the soils and in some regions even the rainforest is cleared to get more space for agriculture. As a by-product of mining nearby rivers and soils often get contaminated with chemical waste and of course timber industry as long as it is not sustainable endangers the forests. So especially in this countries “a great deal of economic activity is concerned with turning environmental wealth into current income and output. [...] If a forest is cut down, the value of the timber is counted in the GNP, but no account is taken of the benefits which were derived from the existence of the forest.” (Anderson 1991: 27). Considering the fact that the negative effects of pollution and exploitation of natural resources do not affect the GNP it seems foolish that the costs for cleaning the pollution increase the GNP. That leads to “a bias in favour of the production of new goods and the depletion of resources, and against durability and conservation” (Anderson 1991: 31). As pollution and a destroyed environment decrease the living standard but do not harm the GNP it is clear that development can not be reasonably measured without including an indicator for the environmental compatibility of a country's economy.
Summary of Chapters
1. Importance of GDP / GNP for IMF and Worldbank: Explains the reliance of major international financial institutions on GDP/GNP metrics to categorize and analyze the development status of nations.
2. Concept of the GDP / GNP: Provides technical definitions and distinctions between GDP and GNP, while outlining their perceived advantages as standardized measures of economic prosperity.
3. Problems of the GNP: Critically analyzes seven major flaws of GNP, including data unreliability, the neglect of environmental degradation, the exclusion of the shadow economy, and failure to account for unequal income distribution.
4. Improving the measurement of development through further indicators: Discusses the necessity of integrating complementary indicators like the Human Development Index (HDI) and Gini coefficient to better reflect societal development.
5. Evaluation of the GNP as an indicator for development: Concludes that while GNP is a broadly accepted economic figure, its value is often overemphasized and insufficient for a holistic measurement of a country's development.
Keywords
GDP, GNP, Development Studies, Worldbank, IMF, Economic Growth, Sustainable Development, Income Distribution, Gini Coefficient, Shadow Economy, HDI, Environmental Impact, Living Standard, Purchasing Power Parity, Economic Policy.
Frequently Asked Questions
What is the core subject of this document?
The essay examines whether GDP and GNP are appropriate or sufficient measures for evaluating the development of a country.
What are the central themes discussed?
The main themes include the limitations of economic indicators, the correlation between growth and welfare, environmental sustainability, and the social aspects of development.
What is the primary research question?
The paper asks: "Are GDP/GNP appropriate measures of development?" and subsequently argues that they are inadequate for a comprehensive assessment.
Which scientific approach does the author use?
The author uses a analytical and comparative approach, reviewing existing economic theory and institutional data to critique the utility of standard national accounting metrics.
What does the main body cover?
The main body details the definitions and advantages of GNP, followed by an extensive critique of its limitations regarding statistical reliability, quality, the shadow economy, social welfare, and environmental sustainability.
Which keywords characterize this paper?
Key terms include GDP, GNP, Development, Worldbank, Gini coefficient, Human Development Index (HDI), and economic indicators.
How does the shadow economy affect the validity of GNP?
The shadow economy, including illicit transactions and subsistence farming, is excluded from official statistics, rendering GNP measurements in many developing nations highly inaccurate.
Why does the author consider GNP to be "overvalued"?
The author argues that GNP is overvalued because it measures only economic activity, failing to account for critical non-material factors like personal freedom, security, and environmental quality.
- Quote paper
- Martin Lochner (Author), 2005, Are GDP/GNP appropriate measures of development?, Munich, GRIN Verlag, https://www.grin.com/document/90290
