Gross National Product at Market Price | National Income

Gross National Product at Market Price!

(a) Meaning:

GNP at market price is defined as “the market value of all the final goods and services produced in the domestic territory of a country by normal residents during an accounting year including net factor income from abroad.

Being gross it includes depreciation; being at MP it includes net indirect taxes and being national it includes net factor income from abroad. Note that GNP is the core concept of national income accounting. Distinction can be made between ODP_MP and GNP_MP. Simply put, GNP_MP is GDP_MP plus net factor income from abroad. Put in symbols:

GNP_MP = GDP_MP + Net factor income from abroad

Remember, GDP is a territorial concept because it includes whatever is produced within the domestic territory of a country irrespective of whether the producer is a resident or a non-­resident (i.e., foreigner). But GNP is an economic concept because it includes productive efforts of only residents of a country within and outside the country GDP is based on domestic territory but GNP is based on normal residents.

The basis of difference between GNP_MP and GDP_MP is Net Factor Income from Abroad. ‘Net factor income from abroad’ is the difference between the factor income earned from abroad by the normal residents of a country and the factor income earned by non-residents in that country. GNP_MP includes all the constituents of GDP_MP plus net factor income from abroad.

Items excluded from GNP/GDP measurement:

The following items are not included in GNP/GDP:

(i) Purely financial transactions: For example, (a) Buying and selling of securities, shares, bonds, etc (b) Government transfer payments (c) Private transfer payments.

(ii) Transfer of second-hand or used goods.

(iii) Non-market goods and services: These refer to activities of acquiring goods and services not through regular market transactions. Therefore, goods which are produced and consumed without using organised market are not included, e.g., services of housewife, small items produced for self-consumption, electric faults repaired by the house owner himself, vegetables grown in kitchen garden, barter transactions.

(iv) Illegal activities: Examples are: gambling, smuggling, sale of illegal arms, drug trafficking, etc.

(v) The value of leisure: Reasonable leisure, no doubt, is helpful in increasing efficiency and productivity of a worker. But there is tendency among people to enjoy more leisure
with increase In Income with the result that their contribution to GDP falls. Since leisure Is Intangible and subjective, It is very difficult to measure Its market value or give It Imputed value. So, It is not Included In GDR

(b) GDP at current market prices and at constant prices:

We have seen that GDP Is broadly the market value of final goods and services produced within domestic (economic) territory of a country. It can be measured in two ways: at current market prices and at constant prices.

When final goods and services included in GDP are valued at current market prices, i.e., prices prevailing in the year for which GDP is being measured, it is called GDP at current market prices or Nominal GDP, For example. Nominal GDP of 2012-13 is the value of output produced in 2012-13 at the market prices that prevail in 2012-13.

On the other hand, when goods and services included in GDP are valued at constant [fixed) prices, i.e., prices of the base year, it is called GDP at constant prices or Real GNP. For example real GDP of 2012-13 is the value of output produced in 2012-13 measured at base year’s (say 2004-2005) prices.

Constant prices refer to prices prevailing in some carefully chosen year called base year. Mind, a base year is a normal year devoid of price fluctuations. Presently in India, 2004-2005 is taken as the base year for estimating GDP (or any other related aggregate) at constant prices.

Real GDP and Nominal GDP (A2010; D11, 11C, 12C): Simply put, GDP at current prices is called Nominal GDP whereas GDP at constant prices is termed as real GDP In other words, nominal GDP of a given year is estimated on the basis of prices of the same year whereas real GDP of a given year is measured on the basis of base year’s prices (constant prices).

Significance of distinction:

(i) Real GDP (i.e., at constant prices) truly reflects performance and level of economic growth in an economy whereas Nominal GNP (i.e., at current prices) does not. How Rs Nominal GDP is affected by two factors, namely, (a) Change in physical output and (b) Change in prices .If current market prices rise fast. Nominal GDP will also rise fast even though physical output remains the same. This means that Nominal GDP can increase without increase in physical output.

Consequently, Nominal GDP becomes deceptive. For instance, in 1991-92, India’s GDP at current market prices increased by 14.7% but at constant prices decreased by 0.1% On the contrary. Real GDP is affected by only one factor, namely. Change in physical output because prices are fixed or are constant. Thus, Real GDP can rise only when there is rise.

In physical output during a year .A country is interested in rise in physical output (or Real GDP) and not in Monetary or Nominal GDP because an increase in Real GDP leads to rise in standard of living of the people.

(ii) Real GDP is a better tool to make a year to year comparison of changes in the physical output of goods and services. A sustained rise in Real GDP reflects the economic growth of the country whereas continuous fall in Real GDP is the indicator of recession.

(iii) Real GDP eliminates the effect of change (rise or fall) in prices whereas Nominal GDP does not. Therefore, Real GDP truly reflects growth of the country. Can Nominal GDP be ever less than Real GDPRs Yes, when prices of current year are less than the prices in the base year?

(c) Conversion of Nominal GDP into Real GDP:

An increase in Nominal GDP (i.e., at current market prices) does not necessarily mean an increase in physical output of goods and services because this increase might have been due to increase in prices. Therefore, to eliminate the effect of price increase and to know the real change in physical output, Nominal GDP is converted into Real GDP with the help of GDP deflator, e.g., Real GDP = Nominal GDP/GDP deflator.

GDP deflator measures the average level of prices of all t that make up GDP. It is calculated as the ratio of nominal GDP to real GDP multiplied by 100.

Expressed in the form of equation:

GDP deflator= Nominal GDP/Real GDP x 100

For instance, if nominal GDP through expenditure approach (quantity of good x price) is 21,000 crore and real GDP is Rs 20,000 crore, then

Nominal GDP/Real GDP × 100= 21,000/20,000 × 100 = 105

To neutralize the effect of rise in prices, we convert nominal GDP into real GDP with the help of GDP deflator. Continuing the above example

Real GDP= Nominal GDP/GDP deflator × 100 = 21,000/2000= 20,000

Thus, it means that the value of current year’s GDP (i.e. Nominal GDP) when into Real GDP with the help of deflator is 20,000 crore. Mind, it is reflects the state of economic welfare and economic performance of a country (Similarly, Nominal GNP can be converted into Real GNP by substituting GNP m place of GDP)

Can Real GDP be greater than Nominal GDP?

Yes, (i) When price level in the current year is lower than that in the base year or (ii) When output of final goods and services in the current year is less than that in the base year? Similarly Real GDP and Nominal GDP are equal (i) When En price level in the base year and current year remains unchanged OR (ii) when quantity output remains the same in both the years. Likewise, real GDP becomes smaller than Nominal GDP Rs when either (i) Price level in the base year is lower than that in the current year or (ii) output of final goods and services in the current year is more than that in the base year.

Is GDP (or GNP) a correct index of Welfare?

Often GDP (real GDP) is considered as an index of welfare of the people. Welfare means sense of material well-being among the people. This (i.e., well-being) depends on greater availability of goods and services per person for consumption. Per head availability of goods rise in economic welfare. So, one may conclude that higher level of GDP (GNP) is an index of Greater well-being of the people.

But this generalization may not be correct due correct due to following limitations or reasons:

(i) Distribution of GDP:

A mere rise in GDP (or GNP or National Income) may not lead in the economic welfare if its distribution results in concentration of income in the hands of very few individuals or firms. A mere increase in GDP does not mean that every individual automatically gets this much of an increase. Distribution of GDP might have resulted in making the rich richer and the poor poorer.

(ii) Non-monetary exchanges or transactions:

Many non-monetary activities in the economy done out of love and affection are not evaluated in monetary terms due to back of authentic data. Thus, non-market transactions like services of housewife, exchanges or transactions through barter, enjoyment from hobbies like Painting, etc. which increase economic welfare, are not included in measurement of GDP Thus, GDP underestimates welfare and hence may not reflect well-being of the country

(iii) Externalities:

These refer to benefits or harms which a firm or an individual causes to another but for which they are not paid or penalised. For example, negative externalities occur such as smoke of a factory pollutes the air or its industrial waste causes water pollution in the nearby river resulting in loss of social welfare.

But nobody is penalised for it nor it is accounted in GDP (or GNP). Similarly positive (beneficial) impact of beautiful gardens and green parks remains outside the realm of GDE To that extent, GDP is under-estimated or over-estimated making GDP an unreliable index of welfare.

(iv) Composition of GDP:

In case increase in GDP is due to more production of war material like tanks, weapons, etc., it will not increase economic welfare, (w) Rate of population growth: If rate of population growth is higher than the rate of growth of real GDP (or real GNP), this will lead to fall in per capita availability of goods and services. As a result, overall welfare of the society tends to fall.

Conclusion:

Although GNP may not be a sufficient index due to above-mentioned limitations, yet it does reflect some index of economic welfare. The reason is that mere enhancement of GNP at any cost may create economic pads like poverty and pollution. That is why some economists have suggested an alternative measure, called Green GNP

Green GNP: GNP (or GDP) does not take into consideration the cost in terms of (i) environmental pollution and (ii) depletion of natural resources caused by production of output. Mere increase in GNP will not reflect improvement in quality of life if it increases environmental pollution or reduces available resources for future generations. That is why the concept of Green GNP has been introduced with economic welfare.

Green GNP is defined as “GDP which is an indicator of a sustainable use of natural environment and equitable distribution of benefits of development.” This concept denotes the following characteristics, (i) Sustainable economic development, i.e., development which should not cause environmental degradation (pollution) and depletion of resources, (ii) Equitable distribution of benefits of development, (iii) Promote economic welfare for a long period of time.