Rethinking GNP: From welfare to cost
Posted Oct 26, 2011 by Joshua Farley
[Excerpt]: Aside from the nation of Bhutan, which strives to maximise Gross National Happiness, virtually all countries in the world single-mindedly pursue endless increases in Gross National Product (GNP), which measures the market value of final goods and services produced by a country in a given year. Economists and politicians alike treat GNP as the best measure of economic welfare. In the United States, GNP growth has averaged about 2.5 per cent per year since the recession ended in 2009. At this rate, GNP will double in a generation, and quadruple in two. Nonetheless, numerous surveys suggest that most Americans believe their economic welfare is declining. Something is clearly wrong.
In fact, most serious economists recognise that GNP is a fairly poor measure of economic welfare. Economist Simon Kuznets first developed the indicator during the 1930s and 40s as a measure of economic activity, and explicitly warned that it should not be confused with economic welfare. Although there have been numerous efforts to transform GNP into a more accurate measure of welfare by adding costs and benefits that are currently ignored, most economists and policymakers stick to GNP as the most useful indicator available. Indeed, GNP is a useful indicator, but has been greatly misunderstood. One must be very clear about precisely what it measures: It does not measure welfare, and is only a poor measurement of activity. GNP is, however, quite useful as a measure of monetary costs.
At first glance, such a statement appears preposterous. Nations with higher GNP are obviously better-off than nations with lower GNP, on average. However, GNP is by definition a measure of what we pay for the final goods and services purchased in a year, and is therefore explicitly a measure of costs. True, costs often correlate with benefits. More expensive products are often better than less expensive ones - but not always, and only a fool would try to maximise what he pays for something. It is also true that GNP is a measure of income from the perspective of those who receive those payments. To determine whether GNP is something we should strive to increase or decrease requires closer analysis...
Originally published October 25, 2011 at Aljazeera