Gross National Product / Gross National Income Research Paper Starter

Gross National Product / Gross National Income

(Research Starters)

This paper will take an in-depth look at two major indicators of the health of a given economy. On the production side, this essay will review the concept of a country's gross national product. On the consumer side, the paper will shed light on gross national income. By analyzing the nature of these two economic indicators, the reader will glean a better understanding of the balance between productivity and consumer confidence in the postindustrial era.

Keywords Gross Domestic Product (GDP); Gross National Income (GNI); Globalization; Gross National Product (GNP); Less Developed Country (LDC); Non-Governmental Organization (NGO); Value Added

Gross National Product


In his iconic work The Wealth of Nations, Adam Smith summarized the balance between the consumer and the producer as a core of a strong, healthy economy. "Consumption is the sole end and purpose of all production," he said, "and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer" (Adam Smith Institute, 2003).

Indeed, production is central to the health of a nation's economic landscape. Then again, as Smith correctly points out, production must occur within the framework of the overall economy—that is, it must attend to the demand of the consumer, lest an imbalance occur. It is for this reason that the main indicators of a nation's economic condition focus on the balance between production and consumer demand.

At the same time, production is linked to the needs of the consumer, as well as a host of other important factors. In an ever-evolving international economic environment, it is invaluable to determine both whether a national economy is healthy and how it compares to others within the international community.

This paper will take an in-depth look at two major indicators of the health of a given economy. On the production side, this essay will review the concept of a country's gross national product. It will also briefly outline some other models employed to gauge economic health, such as gross domestic product. By analyzing the nature of these economic indicators, the reader will glean a better understanding of the balance between productivity, consumer confidence and the changing global economy in the postindustrial era.

Gross National Product

Put simply, gross national product (GNP) is a measure of the total economic output of a national economy. It is derived from that sum of the value of the final goods and services produced each year by the residents of a country, regardless of whether those individuals are living in the United States or abroad.

In essence, GNP is a measure of a country's performance in terms of economic activity. Economists have developed three approaches to studying GNP, assessing income generated and spent by consumers and revenue and expenditures generated by producers. The first of these, the "income approach," studies income derived from wages, interest, rentals, and profits (such as dividends or retained wages).

The second focuses on expenditures by private consumers, firms, and the federal government and by agencies that buy goods and services. Of course, not all expenditures, particularly those by industrialized nations contributing to a global economy, stay within a domestic economy. Rather, some expenditures are for products that are imported, and some are spent on products that are exported. The expenditure approach to compiling GNP data therefore encompasses each of these areas, including money sent abroad for imports ("National Income," 2008).

The third approach looks at the value added to goods and services at varying stages of their production. This "value-added" approach is one of the more complicated aspects of aggregating GNP data, as it does not entail the cost of materials, parts, or brought-in services. Given this fact, many nations apply a value-added tax (VAT) to compensate for losses in revenue that might place labor groups at risk (Keuschnigg, 2007).

While the growth of a GNP may be assessed using these methodologies, such growth does not easily lend to predicting future growth. Indeed, the sheer complexity of a nation's GNP may be the mitigating factor, as the wide range of contributors to a GNP makes it difficult to predict future growth as an aggregate. One study, for example, assessed the predictability of future growth of a given GNP based on governmental announcements regarding such growth. The study concluded that such announcements, while reflective of current growth, did little to foment elements that could be used for predicting future growth (Rodriguez & Schulstad, 2007).

There are a number of benefits to using GNP as a determinant of a national economy's health:

• GNP analysis reviews a product's value at the end of its production, thereby simplifying the intricacies of product development.

• GNP-oriented analysis includes income generated from exports and imports, thereby creating a broad scope of a national economy as it pertains to the global environment.

There are, of course, limits to using GNP as the measuring stick for economic performance. While the GNP assesses a final product's value, it does not account for improvements to the quality of a product. Such a shortcoming does not allow for a full assessment of product development and its future performance in the marketplace.

Although GNP accounts for market-based outputs in the determination of productivity, it does not include nonmarket outputs, such as volunteer service. For example, disaster recovery efforts like that which occurred after Hurricane Katrina required the work of thousands of public safety, health care, military, and volunteer personnel, but none of what was performed during this recovery effort contributed to the economy. Indeed, although its ultimate impact was helping New Orleans reinvigorate itself, the work that was done was not technically quantifiable in terms of the nation's economic condition (Cloutier, 2008).

In an interesting study of less-developed countries (LDCs), the authors offered that that production along the lines of that which is gauged by either gross domestic product (GDP) or GNP is the more applicable approach to studying an individual country's performance. Income, the analysis concluded, is less of an explanatory measure of the output of certain LDCs, while production output, such as those seen from export, appears to be the more relevant aggregation of data on an LDC's economic condition. Indeed, many LDCs are hampered significantly by an inability to even tax income and, as a result, must find alternative tax revenues (Truong & Gash, 1979).

Indeed, there is a wide range of complexities to analyzing all aspects of production as the primary determinant of the state of health of a given national economy. While the increasingly global marketplace necessitates a level playing field of data and assessing the GNP may prove to be that leveling mechanism, there are other important factors to consider.

The World Bank

Since 1993, the World Bank, in its pursuit of ranking nations in terms of economic health, has been following the lead of the United Nations System of National Accounts (SNA) and employing a system of analysis of the status of a national economy that measures total domestic and nonresident income. However, a critical element of the World Bank's methodology was that it was a departure of sorts from GNP. The GNP, after all, measures the total domestic and foreign value added income. Such measurements have allowed the World Bank to assess the most productive of economies and compare them with other nations.

Then again, there is an element to the World Bank's analytical framework that is different from the GNP and GDP systems. Every state in the world employs protectionist methods designed to retain some revenues on imports. These taxes have two purposes: the first is to ensure that domestic businesses are not given an unfair disadvantage by importers, and the second is to generate much-needed revenues for national coffers. Conversely, however, as these taxes represent a blow to income for the importer itself, they can comprise a sizable expense that may help draw an inconsistent picture of the true state of health of a given economy.

Under the gross national income (GNI) framework, however, many of these inconsistencies are avoided by taking into consideration such tax expenditures. Whereas GDP looks primarily at the dollar value of all finished goods and services produced in a given year, GNI takes its perspective from the other side of the equation: GNI, which is an updated version of gross national product,...

(The entire section is 3864 words.)