Computing Gross National Income: 6 Factors to Consider

The following points highlight the six main factors to be taken into consideration for computing GNP. The factors are: 1. Leisure 2. Quality of Life 3. Non-market Transactions 4. Structure of Production 5. Availability of Essential Consumer Goods 6. Externalities.

Computing GNP Factor # 1. Leisure:

An important element affecting the welfare of a community is the amount of leisure enjoyed by its members.

But leisure is not included in GNP. If the gross national income is increased merely by increasing the working hours of labour, it means less of leisure.

In such a ease welfare can be taken to have increased only it country places zero value on leisure. On the opposite, if the same GNP is produced after reducing the working hours of labour, it can be said that welfare has increased.

Computing GNP Factor # 2. Quality of Life:

GNP estimates do not include quality of life as a component with increase in GNP; the quality of life is bound to go down if environmental pollution is freely allowed. Economic growth involves urbanisation which leads to overcrowding, spreading of slums, pollution of water and air. All these reduce the quality of life and social welfare is adversely affected. But the GNP figures place no value on quality of life.

Computing GNP Factor # 3. Non-market Transactions:

Non-market transactions are those which are conducted outside the market system. Examples of such transactions are the transactions of the so-called black market, unwritten donations for religions and community functions etc.

These transactions form a sizable part of the total transactions of less developed countries. But these are not taken into consideration for national income accounting. Thus, the GNP of these countries misses the activities of those who do not enter the regular market system and as such does not show the true total welfare.

Computing GNP Factor # 4. Structure of Production:

Gross National Product shows the total of goods and services produced in the country, not the structure of the product. The national income accountant treats equally the poor man’s goods and the rich man’s luxuries.

Building of a five-star hotel for Rs. 10 crores is considered the same as construction often thousand low-income group (LIG) houses valued at the same amount, even when we know that the latter adds more to the society’s welfare in India than the former.

Computing GNP Factor # 5. Availability of Essential Consumer Goods:

The standard of living of a majority of the people in India depends upon the availability of essential commodities like wheat atta, rice, sugar, kerosene oil, cooking gas and cooking oils.

Greater output of these commodities raises the standard of living of millions of people but the rise in the production of Maruti air-conditioned cars of the same value will mean the same thing for inclusion in the GNP. Obviously, the two things cannot be considered to be equally important from the viewpoint of social welfare.

Computing GNP Factor # 6. Externalities:

External benefits and external costs are real commodities and discommodities produced in the economy which are not included in the GNP estimates. An example of an external benefit is the pleasure one man derives from his neighbor’s fine garden. An example of an external cost is the environmental pollution caused by industrial plants.

The former increases welfare while the latter reduces welfare. Since these ‘external effects’ do not form a part of the market transactions, no value is attached to these and hence these are not included in GNP.

In view of the limitations discussed above, we can say that national income is a poor indicator of social welfare. But some economists have attempted to broad-base GNP so as to make it reflect more correctly the changes in social welfare.

One such attempt is that of Nordhaus and Tobin. These writers constructed an indicator of economic welfare called MEW (or measure of economic welfare). MEW measures all consumption which promotes human welfare. In estimating MEW, Nordhaus and Tobin deduct three items and add three items to GNP.

The deducted items are:

1. Those public and private expenditures which do not yield utility directly. Examples are government expenditure on national defence, police force, road maintenance and sanitation services.

2. All consumer expenditure on durable household goods such as cars, TV sets washing machines etc. which yield utility over their life-time.

3. Estimated costs arising from “negative externalities” which are dis-amenities arising from urbanisation, congestion and pollution.

Nordhaus and Tobin add three items to consumption.

These are:

(1) The value of non-market activities;

(2) The estimates of the value of the services of durable consumer goods actually consumed by the owners, both households and government; and

(3) The estimates of the value of leisure.

By adopting this concept of MEW, Nordhaus and Tobin estimated that the figure of MEW in the United States for 1965 was $ 1200 billion which was double the ONP for the same year. Further their estimate of the growth of per capita MEW for the period 1929-65 averaged 1.1 per cent per year when the per capita growth of GNP for the same period was reported to be 1.7 per cent. The estimates reveal that the GNP growth rate overstates the growth of welfare these days.