From UPSC perspective, the following things are important :
Prelims level : GDP, GNP
Mains level : National income accounting
- With the upsetting news of a secular decline in India’s GDP growth rate, the government has offered several arguments to either say the picture is not as bleak as it is being made out to be.
- This has questioned the merit of the basic variable, GDP used to map economic growth.
What is GDP?
- GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).
- It is slightly different from the other commonly used statistic for national income — the GNP.
- The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
- For example, if Apple manufactures its mobile phone worth $1 million within India, then this $1 million will be counted in India’s GDP and US’ GNP.
- On the other hand, if the US office of Infosys created software worth $1 million, then it will be counted in US’ GDP and India’s GNP. It is the domestic boundary that distinguishes the GDP.
- The modern-day definitions of GDP and GNP can indeed be traced back to Simon Kuznets, who was entrusted with the task of creating National Accounts in 1933 by then US President Franklin D Roosevelt.
- Kuznets’ team travelled the length and breadth of the USA asking farmers and factory managers what and how much they had produced and what they had purchased in order to make their final product.
- The final report, National Income, 1929-32, was presented to the US Congress in January 1934.
- However, the origins of GDP as a concept date far back. Indeed, the man credited with inventing the concept is William Petty (1623-1687), an Englishman who was a professor of anatomy at Brasenose College.
- Petty’s quest started when he received an estate in Ireland. To figure out how much did it value, Petty attempted to account for the benefits from the estate and find an appropriate “present value” of the estate.
- Later on, he applied his approach to the whole of England and Wales to provide the first set of national accounts for the two countries.
Was Kuznets completely satisfied with GDP as a measure?
- But, again, one has to understand that no measure can accurately summarize the welfare or wellbeing of an entire population.
- Kuznets was striving for a measure that would reflect welfare rather than what he considered a crude summation of all activities.
- All measures suffer from some weaknesses. For instance, annual GDP of India is $2.8 trillion but that does not mean that an average Indian is better off than say the average New Zealander ($0.18 trillion).
- An average Kiwi is 19-times richer than an average Indian even though India’s annual GDP is 15-times than of NZ’s.
So, what is the point of GDP?
- Yet, GDP is a variable of great merit. That’s because as a measure, it most sums up more information about an economy than any other variable.
- For instance, countries with higher GDPs have citizens with higher incomes and better standards of living.
- Of course, one can point out variations and suggest that a country ranked 1 in GDP is ranked 9 in GDP per capita but these divergences would be relatively small when data is seen at a global level.
- Similarly, countries with higher GDP can be expected to have much better health and education metrics.
- The so-called richer countries would have better institutions devoted to higher education, research and development etc primarily because they have the money to spare.
- As such, while it helps not to depend overly on just the GDP of a country to make up one’s mind, it is also not a good idea to disregard it as a measure.