Countries are unequally endowed with natural
capital. For example, some countries benefit
from fertile agricultural soils, while others have to put
a lot of effort into artificial soil amelioration. Some
countries have discovered rich oil and gas deposits within
their territories, while others have to import most fossil
fuels. In the past a lack or wealth of natural capital made
a big difference in countries' development. But today a
wealth of natural capital is not the most important determinant
of development success. Consider such high-income countries
as the Republic of Korea or Japan. Their high economic development
allows them to use their limited natural resources much
more productively (efficiently) than would be possible in
many less developed countries. The productivity
with which countries use their productive resources- physical
capital, and natural
capital- is widely recognized as the main
indicator of their level of economic development.
Theoretically, then, economists comparing the development
of different countries should calculate how productively
they are using their capital. But such calculations are
extremely challenging, primarily because of the difficulty
of putting values on elements of natural and human capital.
In practice economists use gross
national product (GNP) per capita or gross
domestic product (GDP)
per capita for the same purpose. These statistical
indicators are easier to calculate, provide a rough measure
of the relative productivity with which different countries
use their resources, and measure the relative material welfare
in different countries, whether this welfare results from
good fortune with respect to land and natural resources
or superior productivity in their use.
GDP is calculated as the value of the total final output
of all goods and services produced in a single year within
a country's boundaries. GNP is GDP plus incomes received
by residents from abroad minus incomes claimed by nonresidents.
There are two ways of calculating GDP and GNP:
- By adding together all the incomes in the economy- wages,
interest, profits, and rents.
- By adding together all the expenditures in the economy-
consumption, investment, government purchases of goods
and services, and net exports (exports minus imports).
In theory, the results of both calculations should be the
same. Because one person's expenditure is always another
person's income, the sum of expenditures must equal the
sum of incomes. When the calculations include only incomes
received or expenditures made by a country's citizens, the
result is GNP. When the calculations are made of all incomes
(or all expenditures) that originated within a country's
boundaries, including those of foreign citizens, the result
GNP may be much less than GDP if much of the income from
a country's production flows to foreign persons or firms.
For example, in 1994 Chile's GNP was 5 percent smaller than
its GDP. If a country's citizens or firms hold large amounts
of the stocks and bonds of other countries' firms or governments,
and receive income from them, GNP may be greater than GDP.
In Saudi Arabia, for instance, GNP exceeded GDP by 7 percent
in 1994. For most countries, however, these statistical
indicators differ insignificantly.
GDP and GNP can serve as indicators of the scale of a country's
economy. But to judge a country's level of economic development,
these indicators have to be divided by the country's population.
per capita and GNP
per capita show the approximate amount of
goods and services that each person in a country would be
able to buy in a year if incomes were divided equally (Figure
2.1). That is why these measures are also often called
"per capita incomes."
In the data tables at the end of this book GNP per capita
is shown not only in U.S. dollars but also in PPP dollars-
that is, adjusted with the help of a purchasing
power parity (PPP) conversion factor. The
PPP conversion factor shows the number of units of a country's
currency required to buy the same amount of goods and services
in the domestic market as one dollar would buy in the United
States. By applying this conversion factor, one can, for
example, convert a country's nominal
GNP per capita (expressed in U.S. dollars in accordance
with the market exchange rate of the national currency)
into its real
GNP per capita (an indicator adjusted for the difference
in prices for the same goods and services between this country
and the United States, and independent of the fluctuations
of the national currency exchange rate). GNP in PPP terms
thus provides a better comparison of average income or consumption
In developing countries real GNP per capita is usually higher
than nominal GNP per capita, while in developed countries
it is often lower (Table 2.1).
Thus the gap between real per capita incomes in developed
and developing countries is smaller than the gap between
nominal per capita incomes.
Although they reflect the average incomes in a country,
GNP per capita and GDP per capita have numerous limitations
when it comes to measuring people's actual well-being. They
do not show how equitably a country's income is distributed.
They do not account for pollution, environmental degradation,
and resource depletion. They do not register unpaid work
done within the family and community, or work done in the
(gray) economy. And they attach equal importance
to "goods" (such as medicines) and "bads" (cigarettes, chemical
weapons) while ignoring the value of leisure and human freedom.
Thus, to judge the relative quality of life in different
countries, one should also take into account other indicators
showing, for instance, the distribution of income and incidence
of poverty (see Chapters 5 and
6), people's health and longevity
(Chapter 8), access to education
(Chapter 7), the quality of
the environment (Chapter 10),
and more. Experts also use composite statistical indicators
of development (Chapter 15).