Dr. Aravind is appointed an ec

News and reports commonly use GDP and GNP. For instance, the USGDP in the first quarter of 2020 went into a negative of 5% and inthe second quarter went to a negative of 31%. Canadas GDP shrank by38.7% in the second quarter of 2020. Swedens second-quarter fall inGDP was the worst in modern history . What does this mean for aneconomy and why is GDP given so much importance by policymakers andnot GNP?

Both are used as measures of the economy as both measures thefinal goods and services. The major difference is the geographicalboundaries as GDP limits it within the country whereas GNP includesactivities performed by its nationals abroad or overseas. GDP orgross domestic product refers to the final goods or servicesproduced within a country during a specific period whereas GNP orgross national product is the value of all final goods and servicesowned by the residents of the country. This implies that the formerincludes all goods and services produced within thedomestic boundary by both citizens andnon-citizens whereas the latter measures only the goods andservices produced by the citizen domestically andabroad.

GDP = C+I+G+NX (CONSUMPTION +INVESTMENT+ GOVT EXP+ NETEXPORTS)

Consumption-residents spending money in shops or purchases ofgoods and services such as haircuts.

Investment – spending on houses, equipment, and capital

Govt Expenditure – govt spending on federal, state, and localgoods and services

Net exports -export-import

A country’s real GDP is adjusted for inflation whereas thenominal GDP is not adjusted therefore for comparison one uses RealGDP to give a more realistic view of the economy. GDP beingpositive or increasing is a sign of a healthy and growing economywhereas the economy falling or being negative as the situationcurrently shows the economy suffering.If we take the example of the US the growth in the first quarter of2020 went into a negative of 5% and around 33 million had filed forunemployment benefits. The second quarter was, even more,devastating with 50 million filings for unemployment benefits andGDP falling to a -31%. With an increase in unemployment and paycuts in major sectors the demand and purchasing power have fallendrastically affecting the production sector directly and also theconsumption(C), investment(I), and net export(NX) aspect of theGDP. The negative and falling GDP implies slow growth andhigh unemployment as was the case even in 1980 or even 2008.

GNP= GDP+Factor payments from abroad – factor paymentsto abroad

GNP gives more emphasis on citizenship and not on output byforeign residents. For instance, an Indian investor who sends hisdividend generated from the holdings back to India will be excludedwhereas a US-based company or airline operation earns income fromoperations abroad positively contributes to GNP of the US. Althoughboth were used as measures currently GDP is the universal measureas GNP was abandoned by the US in 1991 due to the fact that GDP isclosely linked to the other economic data like unemployment andproduction and also for the ease of comparison. Although GDP isused as the measure the difference between GDP and GNP indicatesthe reliance on international trade or financial operations such asFDI.

Today GDP as a measure is highly criticized for not being a goodmeasure of economic well-being. GDPdoes not take into consideration environmental sustainability whichshould be given utmost importance and doesn’t adjust for leisuretime or distribution of goods. The unpaid work of women and theblack market like drug sales, gambling, or prostitution is alsoomitted. The transactions and income from such activities are notreported hence giving less accurate estimates of the GDP. This GDPmeasured is used for structuring government policies andcomparisons but if the result is less accurate it can negativelyaffect the economy and its growth, therefore, questioning themeasure itself as an economic indicator.