AM+DG

MEASURING GDP AND GNP

TEAM M.I

MEASURING GROSS DOMESTIC PRODUCT

AND GROSS NATIONAL PRODUCT
Introduction
In this now rapidly globalizing world, independent states are directing more
attention to their economic performance vis-a-vis other nations. This is due to its effect
on loan approvals from lending agencies, and has its bearing, as well, on ones
attractiveness to trade and investment opportunities.
Several statistics are used by countries in order to measure the health of their
markets business conditions and economic activity. These may come from various
indices such as the unemployment rate, or the level of inflation. Economic strength
could also be gauged through figures of retail sales, trade deficits, and even agricultural
development of a country. Such measurements are called economic indicators.
In this paper, discussion will be directed towards the definition and analysis of the
economic indicators being utilized in standard by governments and multilateral agencies
alike, to measure conditions of state economies the Gross Domestic Product and the
Gross National Product.
Gross Domestic Product
One of the most widely-used measurement instruments available and computed
by almost all economies is the Gross Domestic Product (GDP). The GDP is the value of
the annual aggregate output of a given country, through the tallying of final goods and
services relative to local consumption, total investments (exports minus imports), as well
as government expenditures.
This monetary measurement of annual production of an economy, though should
be calculated with caution so as not to confuse final goods with intermediate goods, or
those goods and services purchased as inputs to production, which may result into
multiple counting.
Certain transactions in which goods and services are exchanged but no new
goods and services are produced also cannot be considered to be part of the GDP.
Public transfer payments (e.g. Social Security System), private transfer payments (e.g.

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gift-giving), security transactions (e.g. trading of stocks and bonds), and sales of
second-hand commodities, are such as these are not derived from current production.
Two Approaches to Computing GDP
GDP can be viewed in two different approaches, with the first one, as a sum of all
market expenditures on final goods and services annually, or the Expenditure Approach.
In this approach, also called the output approach, four categories of expenditure are
summed up Personal Consumption (characterized by durable and non-durable goods,
as well as services received), Gross Private Domestic Investment , Government
Purchases of goods and services, and net exports, or the countrys trade transactions
characterized by the difference of its exports and imports.
In this regard, the Expenditure Approach is characterized by this equation:
GDP=C+Ig+G+Xn
The second approach, on the other hand, can be computed in terms of the
aggregate income obtained from the production of final goods and services, or more
commonly called the Income Approach. This, also called the allocations approach
computes GDP through summing up of income derived from wages, household and
business rent, receipt of interest payments, income both from corporations and
proprietors, and adjustments in taxes, depreciation and net foreign factor income.
Though varying in methods, the two approaches mentioned above, one
measuring the buying side, and the other, the selling side, are part of the same
transaction. It can be said that the amount spent to purchase annual output is or should
be equal to the amount received from the production of annual output.
Nominal Versus Real GDP
A GDP that is measured through the reflection of prevailing prices when the
output is produced is referred to as nominal or unadjusted GDP. It is the aggregate of
what consumers currently pay for the purchase of goods and services. Analysts have
criticized this measurement as not being accurate in reflecting actual changes in output
due to the non-inclusion of other factors such as inflation and the complexities of
computing numerous goods in an economy.
Real GDP, in contrast, is used to measure the production of goods and services
of a given year with a comparison of a base year. With this comparison, prices are
assumed constant or fixed, so as to determine the countrys production of goods and

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services. Some say that Real GDP is a better gauge than its nominal counterpart due to
the former providing percentage change in economic growth from one year to the other.
Economic growth is measured through the development of GDP percentage
growth represented mathematically as the Real GDP of last year minus Real GDP of
earlier year divided by Real GDP of earlier year, as the base year, multiplied by 100%.
The result will determine if the economy is growing or going through a recession. If the
result is positive, it speaks of the GDP percentage growth of a country while if the result
is negative, the economy speaks of a recession.
Growth rate = [(Real GDP of last year Real GDP of earlier year)
divided by Real GDP of earlier year] X 100 %
Gross National Product
Gross National Product, or GNP, is GDP added by one very important factor,
especially for the Philippine Economy the Net Factor Income from Abroad (NFIA).
GNP measures the value of final goods and services produced annually by a countrys
citizens no matter where they are located. Income from overseas employment and
investments less the production of foreigners in the country are the supplementary
factors that affect the measurement of the GNP.
In mathematical terms, GNP = GDP + NFIA.
Approaches to Measuring GNP
There are three approaches that are regularly used to determine the Gross
National Product of a country. One method is called the Production Approach the GNP
is computed based on the contributions of different sectors to obtain the total
contribution of the economy. The three primary sectors comprising this computation are
the agricultural (including fishery and forestry), industry and services sectors.
The Expenditure Approach is another measure being used to compute for GNP.
This combines in sum the personal consumption expenditures of households,
government consumption, investment or capital formation, and exports minus imports.
Last but not least, the Production Approach is another scheme used to calculate
GDP. This entails the consolidation of the production of each industry subtracted by
intermediate purchases from all other industries.

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Gross National Product from 2003 to 2009

(In million pesos: at constant 1985 prices)
Year

GNP

2003

1,171,431

2004

1,252,331

2005

1,320,000

2006

1,391,289

2007

1,495,589

2008

1,587,797

2009

1,634,682

Difference Between GNP and GDP

A nation's GDP is the value of all final goods and services produced within its
borders; while GNP also includes net income from abroad. Simply put, GDP is a gross
measure of market activity. Any time money changes hands, the GDP goes up,
regardless of whether that transaction is desirable for society. As observed by Cobb, the
central measure of well being functions like a calculating machine that can add but not
subtract. Automobile accidents, terminal illness, toxic spills, crime and divorces all
contribute to market activity.
While GNP measures the output generated by a country's enterprises - whether
physically located domestically or abroad - GDP measures the total output produced
within a country's borders - whether produced by that country's own firms or not. When
a country's capital or labor resources are employed outside its borders, or when a
foreign firm is operating in its territory, GDP and GNP can produce different measures of
total output.
GDP

GNP

Total value of products &

Services produced within
the territorial boundary of
a country.

Total value of Goods and

Services produced by all
nationals of a country
(whether within or outside
the country)

To see the strength of a To see how the nationals

countrys local economy
of a country are doing
economically

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The Philippine Setting

In the Philippines, Executive Orders 121 and 352 mandate the National
Coordination and Statistics Board (NCSB) to compile and release the data on national
accounts of the Philippines. This is done in a quarterly and annual basis.
The Philippine System of National Accounts (PSNA) is the technique used by the
NCSB in calculating and compiling information to obtain, quarterly and annually, the
data figures of the Philippines national accounts. The PSNA, since its conception in
1946, has undergone four revisions to year basing of accounts (1968, 1973, 1995, and
2011) to better reflect more relevant and updated basis of comparison.
With the help of multilateral organizations, particularly the Asian Development
Bank, the Philippine-Australian Government Facility Project, as well as the World Bank,
the NCSB implemented a four-step process of improving collation techniques and
quality of the Philippine System of National Accounts (PSNA) to provide greater
usefulness to its stakeholders. This four-step process included the revision of both the
annual and quarterly series of the PSNA, the linking of the two, and the strengthening of
institutional linkages that would improve data quality for the PSNA.
In support of this four-step process of the NCSB, the National Statistics
Office (NSO) also realized and improvement of data coverage and better quality of
surveys to provide more accurate inputs for the NCSBs task to enhance better data
gathering of requirements of the PSNA from its sources (NSO, BAS, BSP, DOST, etc.)
Currently, the Philippine Government calculates GDP and GNP of the country
using the expenditures approach and also the production approach with base year of
1985 prices. Starting 2011, base year will now be peg at year 2000 prices.

GDP / GNP: A Critique

Former President Gloria Macapagal-Arroyo, in her 2009 State of the Nation Address
mentioned of the countrys uninterrupted growth for 33 straight quarters, with GDP
growth from 2001 to 2009 being the highest in 43 years. This growth has given us a
stronger economy, thus providing a more fair arena to the poor than ever before.
However, in the Asian Development Bank report of 2009, the organization stated that
economic growth in the Philippines did not translate into poverty reduction. Though

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moderate growth was experienced by the country, the inequality between the rich and
the poor has remained high.
Governments, politicians, and multilateral organizations make use of the GDP and
GNP to gauge a countrys growth and competitiveness. The two have become basis for
crucial economic decisions.
Criticisms, however, indicate that the GDP and GNP is not adequate insofar as in
achieving the goal of social welfare. One analysis is that the two are very limited in
scope as they only compute for goods and services of the formal market, characterized
by monetary trade, disregarding the importance of non-market activities, informal
transactions and the prevalence of underground economies in a market.
Another concern is that GDP and GNP as measurement of economic growth
encourages unsustainable development. The depletion of natural resources as growth
in terms of production is more valued than sustainable development. Goods and
services offered by nature are secondary to its financial weight. An example of this is
the cutting of forest for lumber in comparison to the social benefits of maintaining a
thriving forest cover. Pollution of air and water, depletion of non-renewables (fossil fuel)
and live stocks (fish, and biodiversity) in the process of achieving greater production are
also left to suffer, for the benefit of the sectors that will raise GDP/GNP.
Another critique on GDP/GNP is that these do not distinguish income distribution.
The two do not specifically state whether gains to the production are equally divided
among all the citizens of the state, or just benefited by a relative few. Economic growth
may be evident in such economic indicators, but do not totally reflect if a trickle-down
effect occurred to also benefit the poor.
Alternative Indicators of Development
It would be best, therefore, if the GDP/GNP go hand-in-hand with other
alternative indicators to obtain a general and wholistic picture of total sustainable and
economics growth. Other statistics that can be used are the Index of Sustainable
Economic Welfare (ISEW), Sustainable National Income (SNI), Genuine Savings (GS),
Human Development Index (HDI) and Gross National Happiness.
To end, the most notable critique about the GDP was mentioned by Robert
Kennedy. He said GDP measures everything except that which makes life worthwhile.
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SOURCES
PRINT SOURCES

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Henderson, David (2007) The Concise Encyclopedia of

Economics Liberty Fund.

Mankiw, N.G. (2002). Principles of Economics 2nd Edition. Thomson Learning.

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McConnell, C. & Brue, S. (1999). Economics: Principles, Problems and Policies.

Singapore: McGraw-Hill Book Co.

Pindyck & Rubinfeld (1995). Microeconomics. New Jersey: Prentice-Hall Inc.

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INTERNET SOURCES

Macroenomic Indicators, What they are and How to Use Them (2010) Pearson
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www.bbc.co.uk/scotland/education/int/geog/health/development/economic/index.
shtml

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Philippine Institute for Development Studies, retrieved May 17, 2011 from
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