The Problems with Using GDP/GNP as a Measurement to Compare Welfare Between Countries

The Problems with Using GDP/GNP as a Measurement to Compare Welfare Between Countries

National Income is defined as the sum total of all goods and services,

i.e. of all incomes produced over a period of time which is normally a

year. It examines the level of economic activity of this period.

National Income is “flow” measure because the income of a country

flows over a period of time rather than being measured at a special

point in time as for example wealth is.

However the way of presenting a country’s national income is the

GDP/GNP figure.

The difference between GDP, Gross Domestic Product, and GNP, Gross

National Product, is “net property income from abroad”, which means

that GDP is the total value of all goods and services produced within

the geographical boundary of a country, whereas GNP is the total value

of all goods and services or all incomes generated by a country’s

Nationals regardless of location.

The GDP and GNP figures are used in many ways.

First of all by the government, firms and economists to forecast

changes in the economy and then plan for the future. Furthermore these

statistics provide the data to test hypotheses over the working of the

economy. Therefore it helps us to understand economic behaviour

better.

Thirdly, GDP and GNP are used for internally comparisons, i.e. a

country’s economic performance compared over time, and externally

comparisons, i.e. between other countries.

Overall it is also used to measure economic welfare and living

standards.

Although national income statistics, i.e. GDP/GNP, are some of the

most useful and widely utilized figures to which economists have

ac...

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...service is fulfilled but only in the second case it is included in

GDP/GNP. This is linked to the discussed problem of household

production.

In conclusion we have to state that GDP/GNP is a very useful measure

of a country’s output. However it does not seem to be the best

comparator of welfare between countries. GDP per capita is actually

the best indicator that we have to define “living standards” and

“welfare”, but nevertheless

there are many problems that arise if we want to compare welfare

between countries with this method. This actually emphasizes the need

for a better measurement. As long as GDP per capita isn’t replaced by

a better manner all the problems which are discussed remind us that we

have to be careful with comparisons and should always try to use other

methods as well to prove our conclusions.