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PROBLEMS ASSOCIATED WITH USING PER CAPITA GNP IN DETERMINING ECONOMIC WELL-BEING

Updated on March 4, 2011

Economic well-being is sometimes determined by using per capita Gross National product (per capita GNP). In fact, Gillis et al define economic growth as a rise in national or per capita income and product. GNP per capita (also called income per capita or per capita income) of a country is simply GNP divided by the population of that country, and it indicates the income each person would have if GNP were divided equally among the populace. Real per capita GNP is GNP minus rate of inflation.

Although GNP per capita is an important measure of economic productivity, it does not measure people’s well-being and the development success of a country, by itself. Since GNP per capita is an average estimate, it does not show how income is distributed and therefore welfare cannot be standardized. It does not show whether people live a fulfilling life or not. Most often GNP estimate does not include non-marketed or non-priced subsistence production and this provides an under-estimation of the GNP. Clearly, the per capita GNP could also therefore not be reliable. Again GNP per capita estimates does not reflect harmful effects of production processes to natural resources and the environment. In making comparison among countries the use of per capita GNP can be misleading. There is the need to use a common unit to compare incomes of different countries. One way is to use exchange rates to convert into one currency. The problem, however, is that, the real income of poor countries may be underestimated. There is therefore the need to construct an international price for better comparison. In this respect, purchasing power parity is a better estimate, since it constructs international prices for a huge number of goods and services, by averaging the prices (expressed in US dollars) of these goods and services over all different countries. GNP for a country is then estimated by valuing its output at these international prices. Again GNP per capita does not take into account any unpaid work done within households or communities and it attaches value to anything being produced without taking cognizance of whether it harms or contributes to general welfare of the people, for example, medicines and chemical weapons. Per capita GNP estimate ignores the value of such elements of people's well-being such as leisure or freedom.

Inaccuracy in population statistics and or the GNP figure would render the GNP per capita estimates incorrect and therefore its use for economic policy purposes would be misleading and erroneous. In some economies, especially some of the oil-rich nations, the GNP per capita may be high because GNP is high. However, the wealth of the nation may be attributed to a few extremely rich people in that society. The per capita GNP in a situation like this may be high. A picture of high standard of living is created, when in actual fact the masses may be living below the poverty line. For the above problems and others, this approach of determining standard of living is not used by most economies in the world today. There is no doubt, however, about the usefulness of per capita GNP in determining the productivity of a country, particularly on per head basis. See the following books and journals for further reading.

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      2 years ago

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