What GDP, GNP don’t tell us

NOT A few question how too much is made of gross domestic product (GDP) or gross national product (GNP), as if faster GDP or GNP growth denotes improved wellbeing in the country. It does not. Even economists will assert that it was never meant to. The United States may have the highest aggregate GDP in the world, but we certainly can’t say that Americans are collectively better off than people anywhere else. Last year, the Philippine economy shone as the second fastest-growing economy in the world, with its 6.1-percent GDP growth, and an even faster 6.3-percent GNP growth. But we all know we cannot claim that

Filipinos improved their lives faster last year than most other peoples of the world did.

GNP and GDP simply measure the level of economic activity, that is, the total value of final goods and services produced in the economy within a specified period, usually in a quarter, or in a year. (The word “final” is important, as counting production of raw materials and intermediate goods and services would lead to multiple counting of these.) Our GNP measures total value of production by Filipinos, whether here or abroad. Thus, it counts production by Filipino workers overseas, and with factors of production Filipinos own, while it doesn’t count production within the Philippines by foreigners and foreign-owned factors of production. It’s helpful to think of GNP as Gawa ng Pilipino. GDP, on the other hand, measures value of all production done domestically (that is, within the Philippines), regardless of who did it. GDP could thus well stand for Gawa dito sa Pilipinas. GDP tends to be more commonly used, especially for international comparisons, being more indicative of vigor in the domestic economy.

Does rising Philippine GDP or GNP tell us that the lives of Filipinos are improving? Certainly not. We must all understand what aggregate GDP or GNP tells us, and what it doesn’t.

First, GDP/GNP statistics only measure production that goes through the markets. Yet so much production never does, as with products produced and consumed at home. For example, one can either buy a meal in a restaurant or cook it at home. A mother can either hire the services of a yaya, or care for her baby herself. A homeowner can either hire a plumber to fix a leaking faucet, or fix it himself. In each case, the former gets counted in the GDP/GNP accounts while the latter doesn’t. So much economic production is missed in the measurement simply because home production activities for own consumption are omitted. This makes comparisons across countries of varying levels of market development problematic.

GDP and GNP measure production of goods and services, whatever their nature. The problem is, some goods and services are produced to offset the ill effects of other production activities. Pollution control equipment is a good example. So are drugs to cure respiratory and other environment-related illnesses. Production of these goods need not take place had it not been for other production activities that harm the environment. And yet as we sum up all of these production activities, we are led to think that the economy has improved, simply because there is more aggregate production.

When you wreck your car in a road accident and injure yourself in the process, you actually raise GDP because of the additional repair and medical services that become necessary. When a family in a rich country sends off their elderly to a nursing home, they raise GDP by the value of the services provided by the latter (yet when a Filipino family decides to care for its own elderly, there is no effect on measured GDP). When a major calamity destroys properties and public facilities, thereby necessitating massive repair and reconstruction, GDP goes up due to such remedial activities. In all three instances, higher GNP is not associated with greater happiness, but rather the contrary. Clearly, there is no direct correspondence between GNP/GDP and happiness or wellbeing. This is because goods and services we consume are not ends in themselves; they are merely means to increase happiness—but can just as well ultimately reduce it (take cigarettes or casinos, for example).

Furthermore, GDP/GNP tells us nothing about how the benefits of production are distributed. A high rate of GDP growth gives little reason to rejoice if the growth turns out to be narrowly-based, coming primarily from a few rapidly-growing industries and benefiting only a few. It is not enough, then, to attain a high output growth rate; the growth must also be broad-based to be of wider benefit to the general population.

Finally, the GDP/GNP accounts fail to consider that increased production activities are accompanied by significant degradation and depreciation of the environment and natural resources. It has long been suggested that a more accurate set of economic accounts should adjust for this depreciation of the “natural capital.” After all, private businesses routinely account for depreciation of capital equipment, along with other direct costs incurred by the firm. What is still keeping “natural resource accounting” from being widely applied is difficulty of measurement.

From all the above, it’s clear that much more than GDP/GNP growth rates are needed to obtain a better and fuller appreciation of how well our economy is doing, and how better (or worse) off Filipinos are becoming. In the end, the GDP/GNP growth rate by itself doesn’t really tell us much.

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E-mail: cielito.habito@gmail.com