Gross National Product: How Good Is GNP as a Measure of National

How Good Is GNP as a Measure of National How does GNP rate as a measure of the overall well-being of Americans? How does exclusion of nonmarket services affect the accuracy of GNP as an index of national well-being? Does GNP account for decreases in the quality of the environment that result from pollution? In this section we discuss important items that affect our well-being that are not included in GNP. 1. Nonmarket production. Many useful services are produced by members of households for the benefit of themselves or their families. Husbands and wives perform useful services for themselves and their families when they prepare meals, make household repairs, and handle their own financial affairs. The value of these services is not included in GNP because they do not represent services purchased through market transactions. The value of work people do at home for themselves and their families has been estimated to be about one third of GNP.' If this estimate is correct, GNP significantly undervalues the total output of the nation by excluding nonmarket household production. The 1985 GNP of slightly less than $4 trillion is worth $5.3 trillion if this estimate of the value of household production is added to it. Perhaps you can see this more graphically if you imagine each husband paying his wife for her services and each wife paying her husband for his services. These services would now become market services and would be included in GNP. Similarly, if more people remain single and hire housekeepers to do work that spouses would normally do without monetary compensation, GNP will increase! Some nonmarket transactions, however, are included in GNP. For example, homeowners who live in their own homes enjoy the housing services their homes provide. In the National Income and Product Accounts, these owner-occupiers are viewed as being in the business of renting their homes to themselves. An estimate of the value of housing services enjoyed in this way is included in GNP. In addition, GNP accountants impute values to farm products consumed on farms, and food, clothing, and lodging furnished to employees. The imputed market values of these goods and services are also included in GNP. Of course, the goods and services made available by governments, such as national defense, are not sold in markets. However, their value is reflected in GNP because government purchases of labor and products necessary to perform its functions are a component of GNP. 2. The value of leisure. All of you place some value on your time. You sell some of your time to employers for labor income; however, you retain much of it for your own use as leisure. Some of this leisure is used to produce household services that, as we discussed earlier, escape inclusion in GNP. The satisfaction you get from recreational activities and other uses of your leisure time also escapes inclusion in GNP. 3. Cost of environmental damage. We Americans may be able to enjoy more and better goods and services each year, but we also must put up with more congestion, dirty air, polluted waters, and other environmental costs that decrease the quality of our lives. Costs are associated with pollution and other aspects of industrial activity that damage the environment. The costs of environmental damage are not subtracted from the market value of final products when GNP is calculated. Some economists, therefore, believe that GNP overestimates the value of output by failing to account for environmental costs of production. 4. The underground economy. The United States has a vast underground economy, which consists of transactions that are never reported to tax and other government authorities. The underground economy includes transactions involving illegal goods and services, such as narcotics, gambling, and prostitution. These illegal goods and services are final products that are not included in GNP! The transactions of the underground economy also include activities by people who don't comply with tax laws, immigration laws, or government regulations and who don't report their income to authorities. For example, a person might obtain a job and be paid in cash without paying any social security taxes or income taxes on earnings. This type of transaction is never reported to the Internal Revenue Service, and because no record of the transaction is transmitted to governing authori-ties, the final product of the transaction often goes unvalued in GNP. Estimates of the value of transactions that take place in the underground economy and are not included in GNP range from as little as 1.5 percent of GNP to as high as one third of GNP.