NDP is a more realistic measure of economic growth for a country

Oct 11, 2022 Letters

Dear Editor,

It is customary for Economists and Statisticians to use several methods to track economic growth of a country and, the most well-known and basic measure of economic output is of course GDP. However, with the passage of time, some Economists have highlighted limitations and biases in GDP calculation and it’s quite understandable that those who compute such figures are more susceptible to defend their quality and contend that alternative measures only marginally alter the macro-picture of the economy.

Point in case; over the years, numerous studies have proven otherwise to GDP as the main indicator of economic growth. Moreso, criticisms of growth measures which currently predominate has to do with the almost entire fixation on GDP as the key yardstick of economic growth, whereas greater emphasis should be given to NDP being a more realistic measurement. Of course, the most basic measure of economic output is GDP, which includes all expenditures for investment. However, that portion of business investment spending that is utilized to replace obsolete and ramshackle capital equipment – depreciation, whilst being necessary for maintaining the level of output; it does not increase the economy’s capacities in the final analysis. In fact, if GDP was to grow primarily as a result of more money being spent to maintain capital stock because of increased depreciation, then it could render negative in net effect to economic growth, (given that capital depreciation at times can be too problematic and, due to changes in capital intensity and the need to write off capital stock, GDP has become less useful due to the lack of real investments in the economy) where additional resources are used to replace capital stocks, which are recorded in the national accounts, in such an economic situation it does not imply that ordinary citizens are better off as a result of higher GDP per se.

The applied technique which is best geared to measure economic growth in Net National Product (NNP) which has a close correlation with NDP. Of note, the difference between NDP and NNP is insignificant in a country with minor foreign ownership, but rather large in a country with high levels of foreign investments. However, this of course does not mean that GDP may not still be an applicable yardstick for certain purposes, such as measurement of the overall production, since depreciation is part of value added to economic output and moreso, aggregate demand in driven by gross investment, not net investment.

Based on such analysis, NDP stands as a more realistic measure of economic growth and for national welfare of citizens. NDP is calculated by deducting capital depreciation from GDP, hereby placing NDP relevance and application for tracking the variables that are not usually associated with “the new-styled economy” based on GDP and which, may not actually indicate the health of an economy, such as potential output and prospects for non-inflationary growth. Furthermore, NDP is considered a more appropriate measure of general welfare for the economy than GDP, since it captures the level of net income created by internal economic activities and a precise measure of sustainable growth.

In summary, for GDP to be an acceptable measure of economic growth, then capital depreciation should always be a share of GDP on a constant basis, which would cause GDP and NDP measures to coincide and supplement each other in tandem with their independent growth output on the economy. However, in cases under current economic conditions where the composition of investment is shifting towards shorter-lived assets, such an economic environment will advance implications of placing greater emphasis on GPD, which would overshadow NDP resulting in overestimation as follows:

– The real rate of economic growth for the country

– The level of increases for productivity

– The potential for increasing wages & salaries without proper assessment of inflationary risks to the labour market and with commodity prices

– Business turnover & gross profits, hence creating artificial (illusions) increases at the risk of investors in the money market.

Truly yours,

Paul Ramrattan, CBMBA, MCBI, ICEA (Grad. Acct.)

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NDP is a more realistic measure of economic growth for a country

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