GNP ACCOUNTING - DIFFERENT APPROACHES
SHAMSUL GHANI (email@example.com)
Sep 29 - Oct 12, 2008
The total value of all goods and services produced in an economy during a given period, normally one year, is known as Gross Domestic Product - GDP. Net factor income from abroad when added to GDP gives Gross National Product - GNP. GDP and GNP net of depreciation take the names Net Domestic Product -NDP, and Net National Product ñ NNP. The accuracy of these economic measures depends on a number of factors such as:
* The efficiency of systems employed and documentation of economy
* The development and literacy level the reporting economy has attained
* The efficiency and honesty level of the reporting personnel
* The degree of political intervention in economic reporting
The list can be longer in the case of developing economies ranking low amongst the peers. However, even the most developed economies can not claim that GDP and GNP figures made public are free of inaccuracies. The reason is simple. Being an imperfect science, economics can not claim mathematical accuracies. The questions of all-inclusiveness and accurate quantification will always be there to haunt the economists. We will briefly discuss the issue in the light of the following table.
EXPENDITURE ON GROSS NATIONAL PRODUCT AT CURRENT PRICES
Govt. General current
Gross domestic fixed
Change in stocks
Exports of goods and
Less Import of goods
& non-factor services
Expenditure on GDP
Plus net factor income
from rest of the world
Expenditure on GNP
Less indirect taxes
Population in million
Per capita GNP (Rs)
Dollar exchange rate
Per capita GNP ($)
in per capita GNP
Normally three approaches are employed to calculate GDP / GNP. The first approach is output or product method under which values of all outputs generated by producers are calculated at current prices. The pitfall of this approach is double counting. To avoid this, only value addition at each stage of production is taken into account. The use of intermediary goods may also give rise to double counting which should be taken care of. The second approach is income method under which all incomes generated in the process of producing output are summed up. All outputs generate income for the factors that produce them. Salaries, wages, interest, rent, corporate profits, dividends etc. are the examples of such income. The third approach is expenditure method under which all expenditure incurred to purchase all of the final output of the economy is summed up. The table above is compiled on the basis of this approach. The components of total expenditure incurred for the purchase of output are:
Consumption (C) : Represents the value of all consumer goods and services purchased during a financial year.
Investment (I) : Represents the value of capital goods produced, including the value of new fixed capital such as plant, machinery, housing etc.
Government Expenditure (G): Represents government's all exhaustive expenditure.
In addition to the above, the net balance of exports and imports is also accounted for. This gives us the total expenditure on GDP. With the addition of net factor income from abroad, the total expenditure on GNP is obtained. Subtracting indirect taxes from and adding subsidies to the total expenditure on GNP, the GNP at current prices is obtained. All three approaches essentially give us the same GDP and GNP figures at current prices.
The phenomenon of ever changing prices has made the economists use two different measures of GDP based on constant and current prices known as real and nominal GDP. The current prices approach gives nominal GDP based on the mixed effect of volume and price changes whereas the constant prices approach gives real GDP based on the singular effect of volume changes. Obviously, the year-to-year real GDP growth is taken as representative and reliable macroeconomic indicator. The ratio of nominal to real GDP for any particular year should indicate the price-change-level in comparison to the base year. The table below compares the real and nominal GDP for the last six years.
Nominal GDP % Growth
Real GDP % Growth
The ratio of nominal to real GDP for the FY08 comes to 3.45 indicating a price rise of 245 per cent in comparison to the base year 1999-2000. Discounting back this ratio for eight years gives an average inflation rate of 16.7 per cent. Comparing this rate with the officially declared inflation rates will make an interesting study. The importance of arriving at the most accurate GDP is self evident as any erroneous measurement may raise doubts about the reliability of the entire macroeconomic data.