What Is The Measurement Before Gdp Measurement

Published Date: 02 Nov 2017

GNP was first used before GDP was introduced. GNP stands for Gross National Production which measure the final value of goods and services produced by a country.

GNP is used to measure welfare of a country besides measure production. However, it is not a perfect measurement of social welfare due to its limitation in measuring economic output. By using GNP, economic activity such as services provided within the family or for barter, is usually not counted and does not result in monetary income. These services will vary widely between different economies, both between countries and among different groups within a country. Due to this kind of problem, the international switched from GNP to GDP was being start from 1990.

The "Gross" in GNP means the estimation of capital consumptions is not taken into account. Hence, the GNP of a country is the total final value or goods and services produced in the market within the time boundary.

The "Product" in GNP measures the final value of the goods produced, by calculating income generated instead of income received.

The "National" measures production that happens in a nation instead of production made by the citizens of the nation which contributed to the nation's income.

GNP can be calculated by summing up

the total expenditure: consumer spending, government spending, private investment made by the citizens of a country

the next exports by substracting off the country's import from the exports made by the country's citizens

GNP = C + I + G + NX + NFA

GNP = GDP + Net factor income from abroad

Net property income from abroad is the profit generated by the nationals of a country regardless they are in the country or not. This measurement of profit also incudes interest and dividend. The income gained of the foreign parties in the country would not be calculated because it is believed that their income will be used in their actual country.

The method of GNP is later substituted by the method of GDP because it is said to give a clearer view of the entire depth and breadth of the economy growth of a country:

GDP measures can be coordinated with other information such as employment and industrial production to obtain other datas

United Nations' System of National Accounts has approved the GDP as the most useful approach. Hence other countries started using this approach to be able to compare the date using similar standards

The use of GNP may be influenced by the inaccurancy in defining the exchange rates.

HOW DOES GDP MEASUREMENT HELP IN ECONOMY?

After switching the measurement from GNP to GDP, the efficiency of measure country economy has been improved. GDP is the market value of the final goods and services that produced within a country in a given period. GDP measurement consists of real GDP and nominal GDP. The growth rate of real GDP is equal to economic growth rate. The economic growth rate is the percentage change in the quantity of goods and services produced from the year to the next year. Real GDP is used for economic welfare comparisons, for making international comparisons of output, and for business cycle forecasting. It also shows the true value of a currency. Thus, we can know the size and growing of economy within a country in a given period by the measurement and comparison of real GDP.

BENEFIT OF USING GDP

Although GDP is an imperfect approach of the economy growth of the ecomony, it is relatively the best measurement exists because experts said that it is impossible to create a perfect measurement for economy growth.

GDP provides digested and revised indicator for the nation, economy analysts, investors, policy mender and economists to look into the economy condition. The consumption and inventory information in the GDP approach measures the economy growth as much as possible and eliminating the factors that are only minimally involved. The defer in the GDP every year and the percentage change of GDP may give a clear and broad picture of whether the economy has improved or the other way round. Suitable solutions can be implemented based on the category in GDP. For example, the investment has declined compared to past year, hence, investors will know and start working to boost the investment factors.

GDP also suggests the best way of standard of living with GDP per capita, which is dividing the real GDP with the population. The GDP per capita estimates the average income each individual can earn potentially. The higher the GDP per capita, the higher the standard of living.

Standard of living = GDP per capita

Labor productivity = GDP/hours used in production

By having these two informations it is possible to calculate the employment rate, which is also a measure of living standard. Productivity also indicates the rise in quality of life. Other than that people are more exposed to enjoy the variety of goods available, it also means that people are working harder to achieve more production.

As GDP are broadly used global-wide, it is easier to measure a nation's economy growth in comparison with other nation. Although GDP is an imperfect measurement by itself, its can be compared with various measurements to get the indication one needs. For example, comparison between countries, comparison with past performance. The GDP can also be asscociated with the inflation rate to study the rise of price of goods.

The measurement of GDP brings several of benefits to the economy and society. One of the benefits is GDP as a measure of the standard of living. Every population in each of a country has their own unique standard of living. We can see the standard of living of population through the result of GDP measurement. For example, ‘NX’ in the calculation of GDP refers to net export. The net export is the excess of export over import which the result is generally seen as indicator of economic growth. We also can see the standard of living through consumer expenditure (C), investment spending (I) and government spending (G).