Gross National Product (GNP) is the

best measure for countrys standard of

living Discuss

Merriam Webster.com says that Standard Of Living (hence forth referred to as SOL) is defined as
1: the necessities, comforts, and luxuries enjoyed or aspired to by an individual or group
2: a minimum of necessities, comforts, or luxuries held essential to maintaining a person or group in
customary or proper status or circumstances
The World Bank defines the Standard Of Living as
The level of well-being (of an individual, group or the population of a country) as measured by the level
of income (for example, GNP per capita) or by the quantity of various goods and services consumed (for
example, the number of cars per 1,000 people or the number of television sets per capita).
Merriam Webster is rather neutral and it depends the standard of living on what we define as
necessities and what as luxuries. Whereas The World Bank is straight forward materializing it,
relating it to how much money you have and what you spend it on.
Over the decades many people have come up with many indexes and standards to define or measure
the standard of living, some ambiguous while some straightforward in what they are basing their values
against.
But we have to say that, not all are depended on pure economics.
Some of the famous methods are listed below
1) Gross National Product (GNP)
2) Gross Domestic Product (GDP)
3) Gross National Income (GNI)
4) Human Development Index (HDI)
5) Gross National Happiness (GNH)
6) Index of Sustainable Economic Welfare
7) The Genuine Progress Indicator (GPI)..and so on

There are many more standards and indexes which, although, not directly are somewhat related to the
standard of living of a nation.

Gross National Product: - It is the final value of all the goods and the services produced within a country
within a year, plus income earned by the citizens (including those living abroad), minus income of non-
residents located in that country. GNP measures the value of goods and services that the country's
citizens produced regardless of their location. GNP is one measure of the economic condition of a
country, under the assumption that a higher GNP leads to a higher quality of living, all other things being
equal.
Through GNP an accurate portrait of a nations yearly economy can be analyzed and studied for trends
since GNP calculates the total income of all the nationals of a country.
Gross National Product can also be calculated on a per capita basis to demonstrate the consumer
buying power of an individual from a particular country, and an estimate of average wealth, wages, and
ownership distribution in a society.
Nominal GNP measures the total value of all output produced using the prices of that time period. For
example, the nominal GNP for 2012 is calculated using the 2012's price level (as measured by the
consumer price index), while the nominal GNP for 2013 uses 2013's price level. The difference in these
two figures is the rate of inflation during the time period.
GNP is a measure of the value of the output produced by the "nationals" of a region. GNP focuses on
who owns the production. For example, in the United States, GNP measures the value of output
produced by American firms, regardless of where the firms are located. Real GNP in the year 2007 was
3.2.
GNP is essentially measure of an economic power of a country. It can tell you more about the financial
wellbeing about the citizens of a country.
The GNP takes the GDP and then accounts for whether or not the citizens and businesses produced the
goods and services within the country's borders.
When calculating the GNP, Included is...
Income earned by residents and businesses
Value of all products manufactured by all domestic businesses
All international business done by citizens and companies
And it subtracts...
Investments made by overseas entities
Income earned by foreign entities
Products manufactured in the by foreign businesses.
It's not as commonly used as GDP by economists. It's a bit harder to calculate and considered less
accurate, because there are more variables that come into play.
In the 20
th
century the GNP and GDP of any country would be almost similar. The differentiating factored
amongst them was very small and therefore the statistical numbers amongst them hardly differed.
But from the late 1970s this difference has widened due to, mainly, because of globalization.
There is a lot of movements in the demographic of a country, keeping it difficult to keep tracks of citizens
of one country living abroad. Also due to increase in the investments in different markets there is an
instability amongst the trackers, them fearing about the longevity of the company in that particular
region. Various new laws in different countries makes it difficult to link the roots of a particular branch of
a company in a different country to its main headquarters in its parent company, increasing the
complications to already tedious tasks of accurate data analysis. Moreover the individuals and
companies, themselves try to not associate with their countries for various reasons. This raises more
dilemma for the analysts as to how to accommodate the benefits from them.

Since we have to compare whether GNP is the best way to measure standard of living for a country, we
first are going to have an overlook of some other important indexes to measure the standard of living
against whom we can compare.

1) GDP
The other most important and widely used method to determine the standard of living.
Gross domestic product (GDP) is the market value of all officially recognized final goods and services
produced within a country in a given period of time. GDP per capita is often considered an indicator of a
country's standard of living.
GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly
equals the gross domestic income (GDI) per capita. GDP is related to national accounts.
Real GDP is the inflation-adjusted value. Average GDP per capita tells us how big each persons share
of GDP would be if we were to divide the total into equal portions. In effect, we take the value of all
goods and services produced within a countrys borders, adjust for inflation, and divide by the total
population. If average real GDP per capita is increasing, theres a strong likelihood that: (a) more goods
and services are available to consumers, and (b) consumers are in a better position to buy them. And
while buying more things wont necessarily help us find true happiness, true love, or true enlightenment,
it is a pretty good indicator of our material standard of living. But as a tool for measuring how well we
live, GDP per capita has its shortcomings. There are lots of things it doesnt take into account, including
I. Unpaid Work
II. Distribution Of Wealth
III. Changes in the Quality of Life
IV. Changes in the Quality of Goods.

2) Human Development Index
The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income
indices used to rank countries into four tiers of human development. The Human Development Index
(HDI) offers a global perspective on the question of how well people are living.
HDI is a composite of three different indicators: (1) life expectancy at birth, (2) education as measured
by a combination of school enrollment and adult literacy, and (3) standard of living as measured by a
variation on GDP per capita that adjusts for price differences between countries.


3) GNI(Gross National Income)
The Gross national income (GNI) consists of: the personal consumption expenditure, the gross private
investment, the government consumption expenditures, and the net income from assets abroad (net
income receipts), and the gross exports of goods and services, after deducting two components: the
gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross
national product (GNP), except that in measuring the GNP one does not deduct the indirect business
taxes.
Coming Back to GNP we first see how it is calculated
Total demand for domestic output is made up of five components: consumption, government spending,
investment, net exports and net factor payments. Because GNP must equal total demand for output, it
can then be expressed mathematically by:
GNP = C + G + I + NX +NFP
The calculation is broken up as follows:
Consumption (C) is the actual consumption spending of the household sector. It consists of food,
clothing and all consumer spending. Consumption is by far the largest component of GNP and accounts
for approximately two-thirds of total demand.
Goods and services (G) is the next largest component of government purchases. These items include
salaries for government employees, national defense, and state and local government spending.
Government transfer payments, such as unemployment compensation, are not included.
Investment spending (I) includes business spending that will improve the ability to produce in the future.
Inventory spending, capital improvements, and building machinery are included in this category.
Investment in housing construction is also included.
The net exports (NX) component is equal to exports (goods and services purchased by foreigners)
minus imports (goods and services purchased by domestic residents). For some time the U.S. has been
buying more foreign goods and services than it sells abroad, which creates a trade deficit, thereby
reducing its GNP.
Net factor payments (NFP) are the net amount of payments that an economy pays to foreigners for
inputs used in producing goods and services, less money the economy receives for selling the same
factors of production.

Breaking the GNP Measuring Stick
While GNP measures production, it is also commonly used to measure the welfare of a country. Real
GNP growth is seen as an improvement in living standards. Unfortunately, GNP is not a perfect measure
of social welfare and even has its limitation in measuring economic output. Improvements in productivity
and in the quality of goods are difficult to calculate. For example, personal computer prices have
dropped dramatically since their introduction, yet their capabilities have vastly improved.
National income accountants try to adjust for improvements, but the process is not easy and far from
precise. Some outputs are poorly measured because they are not priced in an active market. Work done
by volunteers, do-it-yourselfers and stay-at-home parents certainly contributes to a nation's well-being,
but this work is not calculated into the GNP because it is not purchased, nor is there an active market to
measure the value of such activities.
Further, the recovery efforts for disasters add to GNP, yet the welfare of the nation does not improve
because of the tragedy. Take, for example the damage done to Gujarat in 2002 by earthquakes.
Earthquakes destroyed homes, businesses and resorts. Many people were killed, while many were
displaced. Consumer and investment spending to clean up and replace lost possessions and buildings
added to C and me in the formula above. While Government spending for relief and clean up added to
G. As a result, GNP may have risen, but the welfare of the nation was diminished.
Finally, GNP places no value on leisure time. Most would agree leisure time is important to our well-
being. In fact, as countries get richer, citizens generally take more leisure time for themselves. As a
result, the gap between GNP and some other measure of national well-being widens as a country's
fortunes improve.
GNP Vs. GDP
GNP and GDP both reflect the national output and income of an economy. The main difference is that
GNP (Gross National Product) takes into account net income receipts from abroad.
GDP (Gross Domestic Product) is a measure of national income / national output and national
expenditure produce in a particular country.
GNP = GDP + Net property income from abroad. This net income from abroad includes,
dividends, interest and profit.
GNP includes the value of all goods and services produced by nationals whether in the country
or not.
Example of GNP
If a Japanese multinational produces cars in the UK. This production will be counted towards UK GDP.
However, if the Japanese firm sends 50m in profits back to shareholders in Japan. Then this outflow of
profit is subtracted from UKs GNP. UK nationals dont benefit from this profit.
If a UK firms makes profit from insurance companies located abroad, then if this profit is sent back to UK
nationals, then this net income from overseas assets will be added to GNP.
Note if a Japanese firm invests in the UK, it will still lead to higher GNP, as some national workers will
see higher wages. However, the increase in GNP will not be as great as GDP.
If a county has similar inflows and outflows of income from assets, then GNP and GDP will be very
similar. However, if a country has many multinationals who repatriate income from local production, then
GNP will be lower than GDP.
The difference is that GNP includes net foreign income (the current account) rather than net exports (the
balance of trade).
GDP is perhaps the most widely used metric to measure the health of economies. But some economists
have argued that GDP is a flawed metric because it does not measure the economic well-being of
society. For example, it's possible that GDP is going up but median income going down and poverty rate
increasing. GDP also does not measure environmental impact of growth, nor sustainability. Other
important metrics include health of the population, infant mortality rates, and malnutrition rates, none of
which are captured by GDP.
GNP ignores the factor of population. China has a much higher GDP than Luxembourg, but the
standards of living are much higher there because GDP per capita is higher. GNP measures output and
doesn't tell you anything about who produced the output and who received the profits from that output.
GNP tells you what kind of a standard of living is possible in a country (assuming you also know the
population count), but not what the standard of living is for various segments of society. We need
information on income and expenses to determine economic well-being for citizens.
GNP is better off than GDP because GNP measures what a nation makes, not only internally, but
overseas as well hence the term 'National.' On the other hand, GDP measures the sale of goods and
services which are made within a country, hence the word 'Domestic.'



Tabular Form for GDP vs. GNP




















Stands for: Gross Domestic Product Gross National Product
Definition: An estimated value of the total worth
of a countrys production and
services, within its boundary, by its
nationals and foreigners, calculated
over the course on one year.
An estimated value of the total worth
of production and services, by
citizens of a country, on its land or on
foreign land, calculated over the
course on one year.
Formula for
Calculation:
GDP = consumption + investment +
(government spending) + (exports
imports).
GNP = GDP + NR (Net income
inflow from assets abroad or Net
Income Receipts) - NP (Net payment
outflow to foreign assets).
Uses: Business, Economic Forecasting. Business, Economic Forecasting.
Application
(Context in which
these terms are
used):
To see the strength of a countrys
local economy.
To see how the nationals of a country
are doing economically.
Layman Usage: Total value of products & Services
produced within the territorial
boundary of a country.
Total value of Goods and Services
produced by all nationals of a country
(whether within or outside the
country).
Country with
Highest Per Capita
(US$):
Luxembourg ($87,400). Luxembourg ($45,360).
Country with
Lowest Per Capita
(US$):
Liberia ($16). Mozambique ($80).
Country with
Highest
(Cumulative):
USA ($13.06 Trillion in 2006). USA (~ $11.5 Trillion in 2005).


INDIAs GNP vs. GDP



GDP LAST

PREVI OUS HI GHEST LOWEST FORECAST

UNI T
GDP CONSTANT PRICES 14034.32 2013-05-15 15836.11 15836.11 7500.43 13628.81 2013-09-30 INR BILLION
GROSS FIXED CAPITAL FORMATION 4574.59 2013-05-15 5170.39 5170.39 2021.90 4595.67 2013-09-30 INR BILLION
GROSS NATIONAL PRODUCT 88981.17 2011-06-30 77135.07 88981.17 103.60 89948.32 2011-12-31 INR BILLION
GDP PER CAPITA 1106.80 2012-12-31 1085.73 1106.80 228.34 1133.99 2013-12-31 USD
GDP PER CAPITA PPP 3340.60 2012-12-31 3277.01 3340.60 880.78 3411.68 2013-12-31 USD
GDP ANNUAL GROWTH RATE 4.40 2013-06-30 4.80 10.20 -5.20 4.32 2013-09-30 PERCENT
GDP GROWTH RATE 1.30 2012-12-31 0.80 5.80 -1.70 1.43 2013-03-31 PERCENT
GDP 1841.70 2012-12-31 1872.90 1872.90 63.50 1873.88 2013-12-31 USD BILLION

GNP refers to the income available to the countrys citizens as a result of their contribution to production,
It is appropriate to analyses related to sources and uses of income. For Example, saving rates are
normally expressed as percentage for income, and GNP is more appropriate measure for this purpose.
In addition GNP is better than GDP for analyses that focus on the availability of resources, such as
nations ability to finance expenditures on education, infrastructure etc.
At present, we are stealing the future, selling it in the present, and calling it GDP. Paul Hawke.
GDP is more appropriate for many purposes for which an aggregate measure of the nations production
is used.
But then there are many points which rule against GNP. Here are some points which rule against the
usage of GNP.
Total GNP figures are based on flows of money, added together. These figures require adjustment and it
is time that internationally new figures were developed which offer a better representation of real
development. Here are five suggestions:
A. Inflation correction: This correction works well if the INR remains a stable currency and is not
devalued. All economic figures need to be corrected to allow for inflation of the INR itself. If they are not
corrected, all these total GNP growth figures will be inflated. This will be similar to the devaluation of the
poverty line.
B. Informal market: Governments do not measure the value of their informal market and do not include it
in calculation of the total GNP; no product added value is calculated or taxes raised over the informal
market. Many countries with a current high growth rate used to be developing countries with very large
informal markets in which large quantities of goods and services were traded. Yet many self-supporting
people were listed as being under the poverty line as they did not make more than 500 US$ per year.
Fifty years ago, in Africa, South America and Asia, many millions of subsistence farmers and traders did
not count as part of the economy despite having a reasonable and sustainable quality of living. When
calculating total GNP, a realistic estimate must be made of the total value of the informal market, trade
and subsistence farming. If these people enter the fiscal circuit, total GNP will grow, while in reality there
will be no economic change at all.
C. Urban growth: A maize cob may cost a farmer 0.05 to produce, but 1 in the supermarket of a
large town due to transport and trading. The effect is that the more urbanized a country is, the higher the
price level will be, but without any added food quality. A farmer may live in a larger house than a city
dweller, but the latters expensive house is included in GNP because it was constructed and is serviced
within the framework of the formal market, while the farmers house is not. A subsistence farmer can
have a reasonable quality of life on 500 US$/year, while the same amount may mean extreme poverty
for an urban dweller. Countries that currently have high total GNP growth also have a high level of
recent urbanization. Current GNP figures therefore give an indication of the level of urbanization of a
country, but not necessarily of wealth. The essence of this point lies in the fact that different strata of the
society have different meanings for same value of money.
D. Natural resources exports: When a country has resources of mineral gold, oil or hardwood forests,
these represent a value in the countrys economy when they are made tradable through mining, refining
and sawmills. When these resources are sold to another country, they are traded for virtual or paper
money, which will lose its value by inflation if not wisely reinvested within that same country. Important
here is the investment within that country. Selling gold for paper money does not make a country richer.
The current model of total GNP includes these exported resources and includes them in national
economic figures. When Indonesia sells its hardwood lumber to Japan or Malaysia, or when the same
lumber is transformed into timber products, and these products are then sold on the exterior markets,
the added value makes timber workers and the country richer. A recalculation of total GNP considering
only added value without resource exports would considerably change the figures of those countries
which now sell their crude oil, raw copper or other minerals.
E. Population growth: A country which has a total GNP of 3.5% and population growth of 2.5% over the
same period has an average GNP per capita of only 1%. GNI per capita is a more realistic figure. A
problem with this form of calculation is that birth rates in many less developed countries are estimated.
In countries with low birth rates, like France or the Netherlands, the total GNP can be lower than in
countries with high birth rates, while GNI per capita will be the same. A focus on total GNP figures is
therefore misleading.
The above five issues are some of the reasons why fifty years ago many developing countries had a
very low total GNP compared with all-registered and all-taxed European countries. Their large informal
sector was not counted, their natural resources were exported without internally added value, and they
had high population growth. Export of unprocessed natural resources and population growth have a
large influence on the more realistic value of GNP per capita. To compare growth figures over a longer
period, these compensating factors need to be calculated over all these years. The IMF and World Bank
should take the lead in presenting these adjusted growth figures. Since peoples social or economic
welfare is not rated only to economic growth, better parameters such as the HDI, the Bhutan model or
inequality need to be developed.

GNP vs. GNI
For example, the profits of a US-owned company operating in the UK will only count towards US GNI
and UK GDP. If a country becomes heavily indebted, and pays large amounts of interest to service this
debt, this will be reflected in a decreased GNI but not a decreased GDP. If a country sells off its
resources to entities outside their country this will also be reflected over time in decreased GNI, but not
decreased GDP. Therefore, the GDP appears more attractive for countries with increasing national debt
and decreasing assets.
GNP is a concept that goes hand in hand with GNI, GDP. In contrast to the GNI, the GNP does not
account for the balance of cross-country income, such as interest and dividends. In contrast to the GDP,
the GNP account for the values of products and services based on citizenship of the owners rather than
the territory of the activity.

GNP vs. HDI
Since the early 1990s the UNDP (UNITED NATIONS DEVELOPMENT REPORT) has published reports
called the Human Development Reports. An Integral part of the reports are formed by the sections on
Human Development Index. The Index, which is reported for every country, has broadened the
discussion surrounding the evaluation of development. But over the years, the real vision is lost in the
process, and more rhetoric points are being repeated over the years. What started out with a vision to
measure the economic as well as the social development in tangent, lost out on its way. The Index also
fails to include any ecological considerations. This causes a lot of losses in reporting, especially due to
Inequality of the various parameters.
The GNP on the whole consensus is not the most suitable method of measurement of development. It
has its pros and cons, but the cons outweigh the pros, especially in the ever changing dynamics of a
globalized world.
In the last few decades the HDI index importance has risen up, because leading economists and
institutions relate the development to be inclusive and tangible to every human. So the HDI index is
tuned up to fix its glitches to form a variant of the original called IHDI (Inequality adjusted Human
Development Index).
The IHDI takes into account not only the average achievements of a country on health, education and
Income, but also how those achievements are distributed among its citizens by discounting each
dimensions average value according to its level of inequality. UNDP media FAQs.
HDI gives the average of the development per person in the fields of Health, education, Income. In that
the huge difference between the different individuals is highly neglected and the overall pictures are not
very clear, especially for in the developing and the under-developed world, where the gauge social and
economic divide still prevails. It is experienced most in the sub-Saharan regions, followed by south Asia
and the Arab states.
How is IHDI Measured?
The approach is based on a distribution-sensitive class of composite indices proposed by Foster,
Lopez-Calva, and Szekely (2005), which draws on the Atkinson (1970) family of inequality
Measures. It is computed as the geometric mean of dimension indices adjusted for inequality.
The inequality in each dimension is estimated by the Atkinson inequality measure, which is
Based on the assumption that a society has a certain level of aversion to inequality.

With this we can safely say that, GNP is not the best way to measure a countrys standard of living,
mainly due to the fact that it was introduced too late and its times demanded something more than what
it could offer.

Reference
http://matadornetwork.com/life/four-ways-to-measure-your-standard-of-living/#ctZrrMXh2Kq6AOuU.99
http://en.wikipedia.org/wiki/GNP
http://video.about.com
http://www.bos.frb.org/education/ledger/ledger03/winter/measure.pdf
http://www.investopedia.com/articles/07/gross-national-product.asp
http://www.diffen.com/difference/GDP_vs_GNP
http://belfercenter.hks.harvard.edu/publication/536/human_development_index.html?breadcrumb=%2Fe
xperts%2F154%2Fambuj_d_sagar%3Fpage%3D6
http://hdr.undp.org/en/media/FAQs_2011_IHDI.pdf
http://www.bea.gov/