Limitations of GDP as a Measure of Economic Activity:
- Excludes Non-Market Activities: GDP primarily measures market-based economic activities and production of goods and services. It does not account for non-market activities such as household production (e.g., childcare, homemaking), volunteer work, and informal sector activities, which can be significant in some economies.
- Quality of Life and Well-being: GDP does not directly measure overall quality of life, happiness, or well-being of the population. It focuses on economic output and does not capture aspects such as health outcomes, education levels, environmental quality, social cohesion, and subjective well-being.
- Income Distribution: GDP per capita does not reflect income distribution within a country. A high GDP per capita may mask significant income inequalities, leading to disparities in living standards and socio-economic outcomes.
- Environmental Impact: GDP growth often comes at the expense of environmental degradation and natural resource depletion. GDP does not account for the negative externalities associated with economic activities, such as pollution, resource depletion, and environmental degradation.
- Composition and Structure of Output: GDP does not distinguish between types of economic activities and their sustainability. Growth driven by unsustainable practices or over-reliance on specific sectors (e.g., extractive industries) may not reflect long-term economic resilience or well-being.
GNI (Gross National Income) and Its Broader Perspective:
- Definition: GNI measures the total income earned by a country’s residents, both domestically and abroad, in a given period. It includes GDP plus net income from abroad (e.g., remittances, dividends from foreign investments, and payments to foreign investors).
- Broader Perspective: GNI provides a broader perspective than GDP by accounting for income flows beyond domestic production. It reflects the contribution of a country’s residents to global economic activities and their economic interactions with the rest of the world.
- Adjustments for Income Flows: GNI adjusts for income flows such as remittances from citizens working abroad and income earned by foreign residents within the country. This adjustment captures economic contributions that GDP alone may overlook.
- Use in International Comparisons: GNI per capita is often used for international comparisons of income levels and standards of living, as it reflects both domestic economic production and international income flows affecting residents’ purchasing power.
- Policy Relevance: GNI helps policymakers assess a country’s economic engagement with the global economy, evaluate the impact of international trade and investment, and formulate policies to promote economic growth and sustainable development.
In conclusion, while GDP remains a fundamental measure of economic activity and output, GNI provides a broader perspective by incorporating income flows from abroad and offering insights into a country’s economic interactions with the global economy. GNI enhances understanding of national income distribution, economic resilience, and the impacts of global economic integration on living standards and development outcomes.