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Chapter 1: Problem 7

Why is the gross national product an inaccurate indicator of a nation's economic status? How can it be corrected?

Short Answer

Expert verified
Gross National Product (GNP) is an inaccurate indicator of a nation's economic status as it doesn't reflect income distribution, sustainability of growth, value of non-market transactions and costs incurred for activities not improving the standard of living. It can be corrected by including income distribution statistics, using measures like Genuine Progress Indicator (GPI) which considers various other aspects, and adjusting GNP for resource depreciation.

Step by step solution

01

Understanding Gross National Product

Gross National Product (GNP) is the total value of all final goods and services produced by the residents of a country within a specified period (usually a year). It counts the economic activities of the citizens of a country both at home and abroad.
02

Identifying the Limitations

GNP has certain limitations in accurately reflecting a nation's economic status. 1. GNP does not take into account the income distribution within a country. Hence, high GNP may exist with a wide income disparity. 2. GNP doesn't indicate whether the nation's rate of growth is sustainable or not, which is crucial for long term economic stability. 3. It counts activities that may not contribute to improving living standards, example pollution control costs. 4. GNP doesn't include the value of non-market transactions, like volunteer work and household chores.
03

Improving the measurement of national economic status

To make GNP a more accurate indicator, following methods can be implemented: 1. Incorporate the income distribution statistics with GNP to show the picture of economic disparity. 2. Use measures like Genuine Progress Indicator (GPI), which takes into account the sustainability of growth, income distribution, and value of non-market transactions. 3. Adjust GNP to reflect depreciation of natural and human resources.

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