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Gross National Product (GNP): How is it Calculated? What does it Measure?

Economics / Economic Theory Aug 25, 2009 - 04:14 AM GMT

By: Global_Research

Economics

Best Financial Markets Analysis ArticleProf. John Kozy writes: Although the Department of Commerce claims that GDP measures the final value of goods and services produced in the United States in a given period of time, it merely measures the income of the politically sanctioned commercial class. GDP is used as an indicator of how well that commercial class is doing; it is not a measure of the nation's well being.


Have you ever looked closely at how Gross National Product (GNP) is calculated? Have you ever thought about exactly what it measures? Have you ever wondered why it measures that?

The basic formula adds up all the money spent by different groups for specific products and services within a region over a specified period (usually a year).

GDP = C + I + G + (X - M)

Where:

C = Household and personal consumption expenditures

I = Gross private domestic investment expenditures

G = Government consumption and gross investment expenditures

X = Expenditures on goods and services exported

M = Expenditures on goods and services imported

(Removing X and M from the formula yields Gross Domestic Product.)

Many have pointed out the flaws in this measurement:

  1. It does not measure production; it measures sales.
  2. It omits all the money spent in the underground economy.
  3. It doesn't distinguish between money spent in a gambling casino and money spent on a car. Money spent in a gambling casino doesn't buy a product or a service.
  4. It doesn't distinguish between quality and quality.

But are these really flaws? The answer depends on what the measurement's purpose is. Consider the following three examples:

  1. During prohibition (1919 to 1933), the sale of alcoholic beverages in the United States was prohibited, but alcoholic beverages were sold nevertheless. The money spent on them would not have been counted in GNP ("GNP" was first used in 1934). Since the 18th Amendment was repealed in 1933, the money spent on alcoholic beverages is included in GNP. But even today, if there are any moon shiners selling alcoholic beverages in the hills of Appalachia, the money taken in is not included in GNP.
  2. For many decades, cocaine was legally sold in the United States. Since 1914, its sale has been prohibited. Up until 1914, the money spent on cocaine would have been counted in GNP; since then, it is not.
  3. Some of the money spent on gambling is included in GNP and some is not. Gambling has always existed in the United States. Attempts to prohibit it began in the early 19th century. Where it was prohibited, it was carried on by various "criminal" elements, principally the Cosa Nostra. Eventually some of the wealth amassed by the Mafia was laundered and used to build the casinos of Las Vegas where gambling was and is legal. The money gotten illegally was used to build Sin City. The money spent on legal gambling is included in GNP; the money spent on illegal gambling is not.

Although the Department of Commerce claims that GDP measures the final value of goods and services produced in the United States in a given period of time, it most certainly does not. What it measures is the money spent by consumers in a segment of the economy. As the three examples above show, not only are not all goods and services produced included in the measure, the same goods and services are sometimes included and sometimes not. The only relevant criterion is who gets the money. If the vendor is politically approved, the money gets included; if the vendor is not, the money is excluded. So in actuality, GNP measures the amount of money transferred from consumers to politically connected vendors. GNP merely measures the income of the politically sanctioned commercial class. When GNP goes up, the commercial class gets richer; when it goes down, that class gets poorer. GDP is used as an indicator of how well the commercial class is doing; it is not a measure of the nation's well being; it does not account for poverty, crime, hunger, homelessness, and a host of other "people" problems.

So why is the government concerned about only the wealth of the commercial class? Why isn't it concerned with the wealth and well being of the people? Well, it's the economic system, stupid! Capitalism is about the welfare of capitalists, nobody else.

When the first Adam in the garden of Edinburgh ate from the tree of patronage, he produced An Inquiry into the Nature and Causes of the Wealth of Nations, which still serves as the foundation of Classical economics and its numerous variations. The work was not hailed for the cogency of its argument or the systematic nature of its exposition. Criticisms of it emerged almost immediately. What it did, however, was provide a way for the English commercial class to rationalize what it had always done and wanted to continue doing. It gave the members of this class what appeared to be a "scientific" justification for the most outrageous, immoral activities that had always been employed to increase their wealth. It converted the Seven Deadly Sins into the Seven Commercial Virtues. It not only took the good out of goods and services, it took the good out of everything.

The wealth of the commercial class became equivalent to the wealth of the nation; it became GNP. That national wealth, however, does not reside in the nation's treasury, and nation states have become nothing more than means for increasing the wealth of politically connected commercial classes and the political establishment, political-economic oligarchies.

The consequences of this economic system have been deadly and disastrous. It was employed by all of the Western European imperial nations. It was employed by the British Empire from its inception to the end of World War II. What did it accomplish? Well, except for those colonies populated by English expatriates, in 1945, not a single British colony was viable and prosperous. Every colony had been raped to increase the wealth of English commercial interests. But the English people had not faired well either, so they put a socialist government in power. Winston Churchill, their Conservative, heroic leader during World War II, was unceremoniously removed from office to his dismay.

The British Empire lasted from the 16th to the 20th century–almost 400 years. If Adam Smith had been right, Capitalism should have increased the wealth of England enough to make the wealth of Midas look paltry. But England, the nation, never became wealthy. In fact, it could not even finance its colonial wars. It had to borrow fifty million dollars to finance the Boer War. It borrowed money from the United States to finance its defense in both World Wars I and II. Capitalism does not enrich either nations or their peoples. The fifteen nations that have the highest national debt also have the highest GNPs.

The United States of America is now the world's dominant imperial power. It too has the world's highest GNP and the world's largest national debt. It too cannot finance its wars, the rebuilding of its infrastructure, or social programs. Yet it can finance failed commercial enterprises by borrowing money it doesn't have from nations with lesser GNPs. In the current debate over healthcare reform, the major concern of many Congressmen, especially Republicans, is making certain that the nation's medical insurance companies are not forced out of business. To those Congressmen, that concern renders the premature deaths and suffering of Americans caused by curable illnesses inconsequential. If anyone doubts that America exists merely for the welfare of its commercial elite, this analysis of GDP should crush it. Is America the land of opportunity? Yes, but not for you and me. Most of us are merely chattel to be herded, burdened, and disposed of to accommodate the interests of commerce.

Gross National Product is not about products or nations, but it most certainly is gross.

John Kozy is a retired professor of philosophy and logic who blogs on social, political, and economic issues. After serving in the U.S. Army during the Korean War, he spent 20 years as a university professor and another 20 years working as a writer. He has published a textbook in formal logic commercially, in academic journals and a small number of commercial magazines, and has written a number of guest editorials for newspapers. His on-line pieces can be found on http://www.jkozy.com/ and he can be emailed from that site's homepage.

Global Research Articles by John Kozy

© Copyright John Kozy , Global Research, 2009

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.


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