8 Major Limitations of Gross National Product (GNP)

Read this article to learn about the eight major limitations of Gross National Product in Economics.

1. Economic Versus Social Values:

National income and product figures measure the economic rather than the social value of production in terms of market prices of the different types of goods and services.

But such prices of goods and services may not truly reflect the value to the society of the goods and services in a more fundamental—philosophical sense.

A society, for example, may spend identical amounts on health and tobacco, yet one would hesitate to say that the social, as distinguished from the economic, value of these two types of expenditures is the same.

According to Professor Robert Lekachman…. “by the present criteria, gross national product will rise when the sales of auto vehicles increase, regardless of what may happen to the quality of the enjoyments these arrogant vehicles generate or the variety of adverse effects for which they are responsible.” The basic problem with social value of the national output is that it is a subjective matter, depending on individual judgments concerning what ought to be. There is, therefore, no simple or direct basis for the measurement of the social value of the national output. Nevertheless, the distinction between the two is important.

2. Economic Versus Social Costs:

The same difficulty arises regarding economic and social costs because there is no identity between the economic costs of producing the current national output and the social costs of the output. Economic costs include items like factor costs, indirect business taxes, capital consumption allowance etc. for which some kind of monetary value is possible. Social costs, on the other hand, relate to subjective and intangible phenomena such as the general deterioration of the physical, natural and social environments as a result of current production.

For example, the beauty of the country-side may be destroyed beyond repair, as has often happened in mining and industrial areas, rivers and the atmosphere may get contaminated during the disposal of natural wastes, disease and crimes may increase. It is difficult to measure these costs on account of their subjective nature and also to know their magnitude. Still, it is not possible to deny their influence.

3. Distribution of National Output:

National income accounts as prepared currently do not tell us how the total output is distributed amongst the different sections and members of society. It shows the distribution of income in various forms like wages, interest, rents, profits etc. but it does not show the distribution of income to persons. Some economists who feel that greater equality in the distribution of national income is to be preferred to less equality give lot of importance to these elements in measuring the society’s welfare.

4. Income and Output per Capita:

Again, it is necessary to take into account the changes in population as well as changes in real output if meaningful comparisons of economic welfare are to be made every time. A rise in real income will not bring an improvement in the material level of well-being if population grows at a faster rate than the total output. It is, therefore, desirable that for many purposes the correct data of national income and output be reduced to a per capita basis before comparisons are made.

5. Upgrading the Quality of Basic Data:

The need for a good data system was the major concern of the statisticians and economists had assembled for the 15th Conference of The Indian Association for Research in National Income and Wealth held at the Indian Statistical Institute Campus, New Delhi, in November, 1985.

They emphasized the need of upgrading the quality of basic data for correct measurement of national income and welfare considerations in the sphere of:

(i) Women’s share in national income,

(ii) Impact of urbanization on various aspects of national income aggregates,

(iii) Technological changes and their measurement in the economy,

(iv) Proposals for a revised series of national state income, capital formation and savings,

(v) Recent developments in the estimation of state domestic product,

(vi) Capital loss and its possible treatment in national income accounts,

(vii) The problem of output and its valuation in household sectors etc.

6. The Value of Leisure:

In any analysis of economic, welfare the account of leisure time at the people’s disposal ranks high in importance, yet the national income and product accounts do not measure directly the value of leisure to society. During the last half century the length of standard work week has fallen from 70 hours a week to less than 48 hours a week—a development that shows a considerable improvement in welfare. What it means, in part, is that people are willing to exchange fewer goods and services for more leisure.

There is no simple trade-off involved between these. But the fact is that the productivity of work—what an average worker can produce per unit of time—has gone up, so it is possible to work less and yet enjoy the same or even larger bundle of goods and services. It is in this sense that GNP figures do not—they cannot—measure directly the value of leisure to society.

7. Qualitative Changes in the National Output:

Qualitative changes in the national output produced by changes in prices of goods and services must be taken care of, if comparisons were to be made of the national output at different points in time. It is possible, for instance, that the economy might be spending the same amount today, as it did 10 years ago say for T.V. sets, but today’s T.V. sets is in a qualitative sense a vastly different product from the one produced 10 years ago. As such, in the present stage of development of national income accounting, no satisfactory techniques exist for taking into account qualitative changes in the income and product totals.

 

8. The Composition of Output:

The various aggregates of the national income accounting do not tell us much about the composition of national output except in broad terms of consumption, investment, government expenditure etc. The welfare considerations cannot be correctly known without some knowledge of the composition of output, for example, the real GNP during war time may show an increase, this increase does not represent necessarily an increase in the well-being of the people.

Moreover, during long periods the composition of national output may change drastically. In order to evaluate correctly and fully the welfare implications of an increase in society’s real national product, it is necessary to know the composition of the product total and the changes that may have taken place in this composition over relatively long periods of time.