world GDP/GNI discrepancy and the conceptual paradox

Jurriaan Bendien bendien at tomaatnet.nl
Mon Nov 3 21:46:46 MST 2003


The logic behind my argument here, in case you cannot follow it,
is as follows:

(1) Conceptually GNI equals GDP (the sum of value added by all resident
producers in the sphere of production) plus any product taxes
(less subsidies) not already included in the valuation of net output, plus
net receipts of primary income (compensation of employees and
profits) from abroad. That income would be considered normally
to have been earnt overseas, and therefore taxed overseas as well.

(2) The extra net income added to GDP thus refers specifically to the income
received from labour and capital owned overseas by residents of the domestic
economy, minus similar payments made from the domestic economy to
non-residents overseas. Conceptually, these incomes must be related to the
social accounting concept of "production". In other words, it has to be new
income generated by the application of factors of production overseas, which
are owned by domestic residents, income which represents a fraction of
new value added. The net income could be a negative value, or it could be
positive value.

(3) But this means that a great deal depends on how a resident producer
is defined. A resident producer unit in social accounting practice
has a centre of economic interest in a given country
and is considered resident, if from a location (a dwelling, premises or
production unit with a definite address) within that country's territory,
it engages and intends to continue engaging at least one year in economic
activities on a significant scale. If a producer carries out activities in
several countries, it is considered that it has an economic interest in each
of them, but ownership of land and/or structures qualifies the producer
as resident in the given country (in the case of "shelf companies"
resident producer status may or may not be attached).
Residents thus include households, legal and social
entities, such as corporations and quasi corporations (including branches of
foreign companies), non-profit institutions and government, and notional
residents such as seasonal workers and crews on transport carriers.

(4) GDP is supposed to include all newly created income by
resident producers in the production of goods and services, and therefore
whether or not this income is remitted overseas from the domestic
economy by resident producers is irrelevant, what matters is just that
the value is added by resident producers. GNI merely includes
the net income from overseas received by residents who own capital
or hire labour overseas. But that income is already counted as part of
the GDP in the foreign country (gross or net). Therefore,
theoretically world GDP should be exactly equal world
GNI, because for every income generated in country A
which is counted as part of its GDP but transmitted overseas, there
exists an equal income received by country B, and to avoid
double counting the incomes in world aggregates, (once in GDP,
and again, upon foreign, remittance in GNI) we should subtract
the foreign remittance from total income, because it is already
counted as part of GDP there. Instead, we find that
we have a discrepancy of $800 billion. In part, this discrepancy could
be due to problems with currency valuations, but the discrepancy
cannot be fully explained by measurement problems. It must be
due to double-counting.

Jurriaan



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