To compare the GNP of two countries, a common currency must be used. This is done using purchase power parity, taking a representative bundle of goods in the two countries By taking the price of this bundle of goods in each country and dividing one by the other, an exchange rate can be found which is used to compare the statistics of each country. To use GNP to look at welfare, it needs to be converted into real terms to take into account inflation. It also has to be looked at per capita so that the figure is not distorted by the size of the population. However in India a lot of the transactions are not recorded, unlike in the USA where the majority of transactions are done electronically.
Despite taking into account inflation and the size of the population, there are still some problems when using GNP statistics to compare countries. Although the size of the population is taken into account, the distribution of income within that population is not. For example in the United States the wealth is spread a lot more evenly than in India, where the majority of the wealth is held by a very small minority, and so the GNP is a lot less representative. In India a very small proportion of the population enjoys the majority of the country’s wealth, whereas in the USA, whilst not everyone is equal, the disparity between those with the highest wealth and those with the lowest is a lot narrower. This means that the GNP will not show an average for the whole country, as, especially in India, the average will be brought up significantly by the few within the country with a high wealth. This can be shown on a Lorenz Curve:
The nature of the output of each country is also not taken into account when looking at GNP. This can have a great effect on the welfare of the citizens of a country. For example, military expenditure does not add a lot to the welfare of the population whereas expenditure on healthcare and education makes a big difference. The provisions for education and healthcare and education are likely to be a lot higher in the USA as many more people in India do not have access to basic healthcare ad many do not get an education at all. Negative externalities are also not counted. These can have an adverse effect on the welfare of a population. For example in a country where there is a lot of industrial production, such as the USA, pollution will affect the welfare of the citizens more than a country where the majority of people work in agriculture, where the negative externalities are much less.
Non-income factors can also affect the welfare and again are not reflected in GNP statistics. For example natural disasters, political stability and freedom all affect the quality of life of citizens in a country. GNP does not take these into account and in countries such as America and India, where these things are so different, they make a big difference to the citizens’ welfare.
GNP does not take into account many things, which are very important when looking at the welfare of the citizens of a country. The Human Development Index of a country tries to look at factors which are less associated with income and more to do with the living standards. This measurement takes into account GNP, measured by purchase power parity but also looks at other indicators, such as life expectancy and adult literacy rates. Again this does have problems and does not take into account all of the factors associated with living standards. For example when looking at education it looks at literacy rates and not for example the number of people going into tertiary education. This will have a significant effect on people’s living standards as with further education, a better level of employment could be found. It is likely that there is a higher proportion of the population going onto tertiary education in the USA than in India.
The welfare of a country is very hard to measure, especially as quality of life is a very subjective thing. Different people see different things to be important. There are also no measures for many of the things that come into the quality of life. There are also many problems when using GNP or HDI to compare two countries, especially when the two countries are so different as the USA and India are. Welfare is very hard to put a figure to as although there are a lot of factors which affect the welfare of a country, few of them have numerical values and therefore it is hard to put one figure on welfare as a total. The figures used, GNP and HDI do not take into account many of the things, which could be seen by some to have an important bearing on the welfare of a country, but these two measures are the closest thing that there is to a realistic measure of welfare.
