GNP and GDP: Flawed formulas on flawed data
Emilio José Chaves
Independent Researcher in Alternative Economics
Pasto, Colombia, S.A.
January, 14th of 2000

0.0 Summary

XX century econometrics changed the methods of socio-economics research, policy making and planning. They brought new variables, aggregates, parameters, computer techniques and styles of debate. One of those terms, Gross National Product (GNP), and its modern version Gross Domestic Product (GDP) are standard elements used -alone or combined with others- to measure and explain size, growth, consumption, trends and comparisons of economic performance and welfare among nations.

Recent articles have expressed serious doubts about the quality, real meaning and utility of GNP as a key concept. Considering that many papers, academies, researches, theories, media-reports and even political campaigns use those statistical series to support their visions, it is fundamental to understand the history, premises and logics behind them.

This paper is the first part of a series called "Fixing Accounts with XX Century Mainstream Economics" that seeks to propose an alternative road for economics from a world systemic perspective. Later papers include critiques to input-output economics and analysis, firms accounting practices, and government planning criteria, previous to the general proposal.

1.0 Antecedents and Task

In Cobb, Halsteasd, Rowe(1995) article it appears:

"...the GDP and its various proxies ... have become the very language of the nation´s economic reportage and debate...Yet these terms have increasingly become a barricade of abstraction that separates us from economic reality".

" ..In 1932, ..., the Senate asked the Commerce Department to prepare comprehensive estimates of the national income. Soon after, the department set...Simon Kuznets to the task...These (accounts) became the prototype for what we now call the GDP".

" The Nobel Prize-winner Robert Solow of MIT, has called Kuznets's work the <anatomy for Keynes physiology>".

"...The Employment Act of 1946 turned the GNP and the theory it embodied into official policy".

" ..Simon Kuznets had deep reservations about the national accounts he helped to create. In his very first report to Congress, in 1934, he tried to warn the nation of the limitations of the new system: ´The wellfare of a nation...can...scarcely be inferred from a measurement of national income as defined above´".

"Most (economists) are aware of at least some of the basic shortcomings of the GDP. But rather than face those shortcomings squarely,...they have sought to minimize the implications for their underlying models".

" 1991 the GNP was turned into the GDP -a quiet change that had very large implications. Under the old measure, the gross national product, the earnings of a multinational firm were attributed to the country where the firm was owned -and where the profits would eventually return. Under the gross domestic product, however, the profits are attributed to the country where the factory or mine is located, even though they won't stay there.....Conveniently, it has hidden a basic fact: the nations of the North are walking off with the South's resources, and calling it a gain for the South."

"The more basic defects of the GDP have not gone unnoticed among the nations of the world. In France a parliamentary report has called for new indicators of progress; the Treasury of Australia has done so as well. Both the UN and the European Parliament have taken up the issue, and there are ripples even at the World Bank".

Summarizing, Cobb et al. consider Kuznets´s original GNP, and its succesor GDP, as value-loaded measuring tools and propose an alternate one, the Genuine Progress Indicator, consciously built from socio-ecological values criteria.

This quotation is only one example of many articles on the field. Environmental economists have been pioneers in this line of criticism. Our task is to complement it with a logical analysis of the basic formulation employed to estimate it.

2.0 Kuznets Standard GNP Formula (GNPF)

Simon Kuznets, a russian born (1901), emigrated to US in 1922, studied at Columbia University, where he shared the friendship and influence of economist Wesley C. Mitchell. Kuznets received Nobel prize of 1971 and made a valuable job gathering US data for years 1869 and on. He was credited with developing the Gross National Product, worked from 1927 to 1963 at the National Bureau of Economic Research, member/chairman of the Social Science Research Council Committee on Economic Growth, from 1949-1968.

The point to be remarked, is that Kuznets data, transformed through a model formula, GNPF, became a consulting and procedural standard for the last 50-60 years in mainstream economics, government statistics, planning policies, media, and familiar language over the world. GNP/GDP may be considered global mythical terms of the XXth century, unknown for our ancestors of previous centuries.

Thousands of important economists as Keynes, Leontief, and even disident researchers have profited from Kuznets figures and formulas to support their models and forecasts. Some of them have been so succesful that they even won the Nobel Prize in Economics. Therefore, revisiting GNPF is a valid and instructive task.

2.1 Inside Gross National Product Formula (GNPF)

Let's use following clear and simple definition by Tikhman (2).

GNP is the dollar value of all final goods, services, and structures (houses and commercial buildings) produced within a country during any one year.
The formula of GNP is DOM ([domestic]/consumer consumption) + I (investment) + GOV (government spending) + (EXP-IMP) (exports - imports). ....<symbols changed by paper author>

National income accounting is a system of statistics and accounts that keeps track of production, consumption, saving, and investment in the economy. This data then becomes part of the National Income and Product Accounts (NIPA) kept by the United States Department of Commerce.

Simon Tikhman

We may apply this definition to other nations by changing the names of currency, statistics agency and commerce office.

Observe that GNP makes reference to:

1) Currency value of year production within a country.

2) A formula that mixes local "consumption" (DOM,I,GOV) with traded items: Exports (consumed abroad), and Imports (consumed at home) and declares it the year "product" value, as also the year "final demand".

3) Formula mixes values of final goods/services (DOM,I) with others that may be final or intermediate ones (GOV, Exports, Imports).

4) GNP requires official institutions to gather data, organize it according to formula, and use it for information and policy making.

Basic elementary data is supplied by firms accounting reports, people income reports, and government agencies.

Frequently, GNP (production or supply) is equated to Gross Final Demand (GFD) (final consumption or use), implying the equilibrium supply/demand, or:

GNP = GFD (Gross National Product = Gross Final Demand)

Sometimes, Kuznets formula is also presented with an small modification where Investment(I) is divided into inventory stocks change(INV) and capital formation change(CAP). So GNPF is formulated as:

GNP=GFD = GOV + INV + CAP + DOM + EXP - IMP ...... where:

GNP = Gross national product for the period

GFD = Gross final demand inside nation and period

GOV = Government paid consumption during period

INV = Change in inventory stock at the end of period

CAP = Capital formation change at the end of period

DOM = Domestic consumption by homes during period

EXP = Exports during period or product consumed abroad

IMP = Imports in period, or foreign product consumed by nation

This model of GNP/Final Demand has some inner logics because:

a. The property of government activity is supposed to belong to national people.

b. The property of INV and CAP belong to firms and government, they are purchases not consumed/wasted and stored by capital/government owners.

c. DOM is a mixture of personal or family consumption bought with the income of the mass of people without differentiating who is waged people, and who is a firm owner.

However, this GNP formula is not logical and at the same time clearly counter-factual, to us, because:

a. It adds government expenses (a part of intermediate consumption by government activities) as if they were finally consumed by the people, which is not true. Only state social final goods/services given to people are finally consumed by them, the rest, a big percentage, definitely not.

b. It adds exports (a foreign consumption) as if finally consumed by the system.

c. It substracts imports (a local consumption of the system mainly used as intermediate product to produce final goods) from nation consummed/stored final goods/services produced.

What kind of logics is this?, that in order to measure the finally consummed product inside the nation:

1) Adds domestic consumption (fine)

2) Adds consumption outside nation (exports)(doubtful)

3) Substracts consumption inside nation (imports), (doubtful)

4) Adds the intermediate consumption of a sector called Government, which is made of unfinished goods/services not ready for final consumption by the people? (doubtful)

As any productive sector, the price of government sells to families and firms, which is called taxes, appear in the cell where the column Domestic Economies purchases intersects the row Government-sells in the Input-Output-Data table. So adding again government total expenses is an unjustified distorsion of national accounts.

GNPF handles well the capital formation change -a form of investment- and the inventory change -another form of investment- both for private and public sectors.

Exports, are part of the final Output, or Total of Sell Transactions, but not part of final internal demand, because they are sold to be consumed abroad. They are made from the intermediate products -which require part of the national work-. Exports are just pure surplus, or pure profit, that increase the income of export owner. So they are part of the Value-Added produced in period, they are not consumed at home, and are part of international capital outside nation control. Exports are just controlled by their owners.

These few arguments should be enough to return GNP/GDP formulas to mainstream academics so they may repair them.

2.2 Value-Added and Internal Demand Concepts

After previous remarks, the urgent task should be to propose an alternative approach to those concepts. Although not explained in depth, some considerations about it are sketched for future treatment.

There are at least two ways to define Value-Added (A), and internal demand (D):

1. A1= Value-Added really produced inside nation.

It may be obtained from an Input-Output National Accounts table. Formula may be:

A1 = T - C ....... where:

T= Total of Sells or Income Transactions

C= Total intermediate consumption seen as a cost

it may include "imports" from other nations.

2. A2= Value-Added really enjoyed inside nations.

A2 = A1 + I - E ....where:

A1= Value Added really produced at home

I = Value-Added brought from outside (imports)

E = Value-Added sent abroad (exports)

A counter-mainstream logics to be explained later.

3. D = Internal Final Demand

D = T - dC ....where

T = Total of Sells or Income Transactions

dC = Demanded Sells of Intermediate Product to other sectors

D = Internal final demand (our GNP)

Thesis here is that A2 = D, enjoyed value-added equals internal demand, so:

D = A1 + I - E


1. And what is an import? The answer depends on the observer: From the space it looks as a transfer of physical goods/services inside a nation, so it increases the wealth of the receiving nation. From inside the importing nation it depends of:

a) If you are the owner of an small firm, an import is some raw material or capital element that you buy from abroad because the nation do not produce them as you need them, and you pay it with part of your sells. So it is like an exchange.

b) If you are an exporter, you need to do something with this part of surplus. One way is to reintroduce it in the form of imports of goods/services needed inside the nation. In this case the import is only a recycled surplus, which the owner calls an investment cost. Commercializing of this imports also may produce a new surplus, and the cash to pay the import in the foreign market.

c) If you are an investor in foreign economies, it means that in some moment you exported your surplus to another country (invested it). Given that you obtained profits there, and paid all your costs, continuos surplus may be reintroduced inside your nation in the shape of needed imports.

In summary, excepting case a), the other two are net transfer of surplus, case b) is an exchange of surplus between surplus owners, case c) is the entering of value-added obtained abroad, of foreign surplus obtained abroad, inside your nation.

This is the reason why powerful nations, like those of OECD, import from periphery much more than what they export to periphery. Their economy is healthier when their imports are substantially bigger than exports because they bring as imports the surplus obtained abroad, given that they own firms and property outside (invested there). This goes against the orthodox recipe given to peripheric nations, because that is the roll they expect from them, but do not apply in core economies. So the key point is who are the owners of international market, who predominates among them? This is related to ownership, to the distribution of capital among the people of the world, not to market, nor productive efficiency.

All this question requires to build a global system model, to be done in another paper.

3.0 Standard Accounting Procedures

As said before, each nation establish accounting rules so people, government and firms prepare their reports to tax-authorities and statistical offices, where GNP or GDP formulas are applied. Let's read several times the following quotation, also from Tikhman's clear paper:

Investment is the depreciation, retained earnings, and personal savings borrowed from consumers through the financial system. Depreciation is considered a form of income because businesses are allowed to treat it as an expense and subtract it from their profits before they pay taxes. Because the depreciation never leaves the firm, it is a form of income to that sector. Its meaning is quite clear: government rules allow to treat depreciation as a cost in standard accounting, in spite of the facts that they never leave the firm, and real costs of renewing capital goods wasted are also counted as costs. Thus, real profit is decreased, costs increased, and less taxes paid thanks to this accounting trick.

In other words, part of value-added and surplus is hidden and presented as a cost increase. Later this data is gathered and aggregated under GNP/GDP questioned formula to build their final reports.

What does it mean? That from real peoples data, we apply a flawed accounting model, which then serves as basic data to BEA, which applies another flawed formula of GNP/GDP to it, and then publish it for people and academic consumption.

This is one reason that preliminar statistics of total cost to total value-added ratio (Q/A) produces values somewhat bigger (around 10 %)than expected. Fortunately even in spite of this distorting flaws, it is possible to recognize the basic shape of national economies.

In logics, from flawed or counterfactual data, we may derive any fiction. The problem is compounded when flawed models are used to create new data, to process it, and to interpret results.

This sounds like a madness whirlpool: Take basic firms data, compound it with flawed accounting formulas and the result is flawed information. Apply to it another flawed formula, and the result is GNP/GDP. Compound it with a new model of analysis, or a mathematically complex model, and the final result may be either an IMF/WB/WTO neoliberal recipe, a new Nobel Prize winning theory, or a presidential speech.





Besides ecology criticism, there are serious problems of data handling and conceptual logics behind traditional GNP/GDP. Another serious consequence comes from the fact that each nation has a different share of property over its imports and exports. So what is good for the core, may be damaging for peripheric nations. It is conceded that there are cases of fair and mutually beneficial exchange between nations. But in a world controlled by transnationals, and by governments that are their tools, the tendence is to favor an increasing core-to-periphery exploitation, core-peripheric distance, planetary concentration of wealth in the core side, and misery in the peripheric side. Add it with the use of core force through warfare sanctions (legal, militar, commercial, sabotages, blackmails, leaders killing, blockades, demonization campaigns, etc.), plus the complicity of peripheric elites and armies, and then you have to admire those small countries that have resisted their pressure.

And the core is doing it in the name of market, efficiency, growth, freedom, humanitarianism and democracy. Call it market-techno-fascism, or "neoliberal-democracy", the name of the game is not as important, as its terrible effects.

Back in the theme, questioned concepts plague a substantial part of XX century economic theories. This is the reason why many people believe that mainstreamers have done just plain bad science. Keynes consulted economic historical series to build his theory, Leontief built his IO-Economics and Analysis from it, IO-National Accounts use them, when not as data, at least as a referent to match their statistical data, etc. But it is still a sacred truth for many economists, text-books are full of them, teachers preach students with them, growth news refer to them, and the whirpool goes on.

So, it seems that there are several weak points in mainstream macroeconomics main formula that justify to return it to their academies for repairing it. Meanwhile, let's work out alternative roads.