Why is GNI per capita a good measure of development?

One of the most important questions of development politics is what development actually means and how you can measure it. Although nobody will seriously dispute the fact that development has an important political dimension it is usually the economy which is in the focus of multinational organizations as for example the IMF or the Worldbank. The most important indicator for economic prosperity is the Gross Domestic Product (GDP) respectively the GNP which is a close relative. In fact the Worldbank defines developing countries as “countries with low or middle levels of GNP per capita” (Worldbank Glossary). This shows the tremendous importance the GNP has for the work of the Worldbank. In the following essay the value of the GDP as an indicator for development will be assessed. It will be shown that it is a valuable indicator under certain conditions, but that it is clearly not sufficient to make sound statements about the development of a certain country. In fact it can even be misleading in some respects and dividing between developing and developed countries just on the basis of the GNP is certainly not appropriate. At first I will explain what GDP, GNP and its growth rates actually mean and what they can tell about the economy of a state. The specific advantages of this indicator will be mentioned and the correlations between it and development. Then I will oppose that with the great variety of problems the GDP and similar indicators have. As a conclusion I will show that for a fairly acceptable measurement of development it will be necessary to include some other indicators beside the GDP as well. Development is more than a high level of economic activity it also includes the general standard of living and the degree of personal freedom and security.

2. Concept of the GDP / GNP

2.1 Definition of the GDP, GNP and growth rate

The GDP is defined as the value of the final goods and services produced in a country in one year (Mankiw 2001: 522). This value is usually given in US-Dollar and equals the total amount of all sorts of official income and profits and also the sum of the total consumption, investment, government puchases and net exports in a country in a year. The difference between GDP und GNP, the Gross National Product, is that the GNP measures the value which was produced by the citizens of a country, wherever they live and work. That means for example that the profit a British company made in a developing country contributes to the GDP of the developing country but not to its GNP but to the GNP of the United Kingdom. The Worldbank usually refers to the GNP as GNI (Gross National Income). The total of both figures are divided by the population of the relevant country to get the figure per capita which is the one used when comparing the figures of different countries. The growth rate measures the development of the GDP or GNP in comparison to last year in percent. This rate is not influenced by inflation as the prices for the basis year are taken for both years.

2.2 Advantages of the GDP / GNP

The big advantage of the GDP/GNP is that it is a single figure which contains a huge load of hints concerning not just the economy but also the general living standard in a country. The GNP per capita is not only the average income in a country - countries with a higher GNP can usually afford a better health care and educational system (Weltbank 2004: 41). They normally have a higher life expectancy, better access to drinking water and a lower child mortality rate. They typically do better in all of this sort of indicators. To summarize it: there is a strong correlation between the GNP and the development of a country. Futhermore the GDP/GNP is a figure which is generally recognized and available for nearly all countries. So it is not astonishing that the GNP/GDP is the most frequently used indicator in institutions like IMF and Worldbank.

2.3 Preconditions for the use of GDP / GNP

By using the GDP or the GNP there are some preconditions which should be fulfilled to get a valuable information out of it. For the purpose of measuring the development of a country the GNP is significantly better than the GDP. The difference between the GDP and the GNP of a developed country is normally quite small. For developing countries it is often very significant. According to data of the Worldbank the total GDP of the least developed countries according to the definition of the UN is nearly 6 % higher than their GNP. In Sub Saharan Africa the difference is even higher by more than 20 % (Worldbank Data & Statistics). It is quite obvious that the profits western companies get from their facilities in developing countries do not contribute to the living standard of the people in the developing countries. Another problem is that you cannot simply compare the value of a Dollar in any given country and the value of a Dollar in the U.S.. The purchasing power of a US-Dollar in Angola for example is higher than in the U.S.. To solve this problem you have to use GNP figures which are converted according to purchasing power parity. This takes the different prices in different countries into account. Another problem occurs with growth rates. Although it gives a useful hint about the progress a country has made last year, it is crucial to keep in mind that a poor country with high growth rates does not necessarily better than a rich one with moderate growth rates as the growth is always related to the basis. However even when keeping all this conditions in mind the value of the GNP and the GDP as an indicator for development is significantly reduced by its following problems. In the following I will usually refer to the GNP per capita after purchasing power parity but of course the same problems are true for the GDP too.

What are the advantages of using GNI per capita to measure development?

How can GNI be used to measure development?

What does GNI show about development?

Why is GNI a better measure than GDP?