Limitations of GNP Measurement

Limitations of GNP Measurement

GNP is widely used to calculate the overall grwoth of the economy, howerver, this system have number of limitations. These limitations have been explained below

1.    Self Provided Services Are Not Included

GNP does not take into account self provided services, for example if you have repaired your own motorcycle, then this service will not be included because you have not paid any amount for such service.

2.    Domestic Service Are Not Included

Household services form a big portion of total services performed during the year, but this service is not included in GNP calculation. So it is more appropriate to say that GNP is only reflecting the paid services in the economy.

3.    Illegal Activities have no record

GNP also does not take into account the illegal activity, because such activities are not reported . In some countries theses service (smuggling) form a major economic activity.

4.    Vague indicator of performance

Some countries have a huge output, but have a very low living standard . Therefore some countries have started to maintain physical quality of life as performance measurement of national progress.

5.    Reflect only overall performance

GNP reflects only overall performance of the economy, and therefore does not reflect actual situation. Increase output is an indication of increase level of income of whole nation, but in fact this increased income is shared by  few families (industrialist).

Product method of GNP Measurement

Product Method of GNP Measurement

Under product method of GNP measurement cost of all goods & service produce during the year is added or summed up. Only final goods & services are included under this method.

Goods & Service not Included (Excluded)

1.    Old Goods

Only new goods and services produced during the year is included under this method.

2.    Government Transfer Payments

Transfer payment such as pension etc is not included as payment against services, because no service is being provided against this type of payment.

3.    Private Transfer payments

Private transfer payment (without being received any service) should not be included as payment for services. Such payment include charity, zakat etc.

Income Method of GNP Measurement

Income Method of GNP Measurement

Under income method of GNP measurement, all payment or cost of acquiring production factor is summed up. In other word income generated by the people (income of factor of production) are summed up.

1.    Wages

Under income method of GNP, wages are from a major part of production process. Wages are people remuneration against their services.

2.    Rents

Under GNP method rent income against use of building, machinery etc is also a key income element.

3.    Profit

Under income method of GNP, profit earned by the private firm is also included in the national income of the country.

4.    Business Taxes

Business taxes though not a factor of production, but still incurred by the business man as result of production, and therefore included as payment for production.

5.    Depreciation

Under income GNP method, where production cost are included for calculating GNP, deprecation is also included being a cost of production.

Expenditure Method of GNP Measurement

Expenditure Method of GNP Measurement

In expenditure of GNP measurement or calculation all expenditure incurred during the year is summed up. This expenditure includes consumption expenditure, Government expenditure, investment expenditure, and export minus import.

1.    Consumption Expenditure

Consumption expenditure can be classified into two expenditure i.e. immediate consumption expenditure like rice, wheat & consumption expenditure on the durable product like Television, juicer etc.

2.    Government Expenditure

Government also incurred expenditure for provision of services to the public i.e. health, educational and also expenditure on the infrastructure project (bridges, railway line, tunnels).

3.    Private Gross Investment Expenditure

People expenses their income in two ways i.e. personal consumption and investment expenditure i.e. amount spend on producing of new goods. Expenditure under this method means both new expenditure & expenditure on replacing existing goods.

4.    Export Income

Export income shall also be included while calculating GNP under expenditure method. Net income from export means export minus import expenditure.

5.    Excluded Expenditure

Following expenditure shall not be included under this method

·         Expenditure on partially manufactured goods (to avoid double counting)

·         Expenditure on old Goods (already taken in national income once they were new)

·         Transfer payment ( These are not expenditure rather gift)

Measurement of GNP

Measurement of GNP

GNP stands for Gross national product i.e. summation value of all final goods and service produced during the year. GNP is measured at market price. GNP may be measured by three methods i.e. expenditure method, income method and product method.

1.    Expenditure Method

Under expenditure method total expenditure on good and serviced are added to calculate the GNP. The expenditure which is summed includes consumption expenditure, investment expenditure, government expenditure and net income (export) from abroad.

2.    Income Method

Under income method income of factor of product are summed up. Income of factor of production includes wages & salaries, rent income, interest income, dividend income, indirect taxes, depreciation.

3.    Product Method

Under this method all prices of final goods and services produced in the country is summed up. Only final goods should be included in the calculation & and good under production process should be excluded from calculation.

Types of National Income

Types of National Income 

1.    Gross National Product

GNP is the value of all goods & service produced during the year. GNP is used to determine the output level of national economy and therefore may be deemed national income or output. There are linked relationship between output, income, expenditure .Therefore GNP can calculated by using three method i.e. production methods, expenditure method, and income method.

2.    Gross Domestic Product

GNP also include income from export, some people believe that this should be excluded from national income, because this is an external source of income. And therefore by deducting the net income from export, we can get Gross domestic product.

3.    National Income

National income is concept of people income earned during the year. It is important to notes that NNP takes into account business taxes, but these taxes not form part of income of people, therefore these taxes should be excluded.

Similarly subsidies provided by Government is kind of income, but this income does not reflected in GNP, and therefore these should also be added to income of people.

4.    Personal Income

Personal income again relates to income of people, GNP does not take into account transfer payment as national income, while for people, these are income, therefore while calculating personal income, and transfer payment should be included.

Undistributed profit & taxes on profit have not received to people as income, so these both are also excluded from the national income for calculating personal income.