Appendix A: The Calculation of the Gross National Product

In constructing a measure of the total wealth of the country, economists come up against a major difficulty. It is that the units in which wealth exists are incommensurable; i.e., they are quantities which cannot be added together. The wealth of an average American consists of things like; a car, a house, meat, potatoes, bread and butter, a beautiful painting over his mantle, a college education for his child, an operation for his mother, a record player, etc. Now how does one add these things together? Well, a start might be made by breaking the car down into its component parts; 2,000 pounds of steel, 50 pounds of lead, 25 pounds of rubber, 5 pounds of copper, 20 pounds of upholstery, etc. Here, at least, the quantities are commensurable, but one has the sinking feeling that adding them up really doesn't mean too much. For example, adding the above items we get 2,100 pounds. But is this really a measure of the man's wealth in the car? If someone were to take away his car and givehim 2,200 pounds of steel, would he be wealthier? The answer is clearly no. But in that case he would have 2,200 pounds instead of 2,100.

The conclusion that must be drawn is that weight is not a measure of wealth. Further, when we came to add in the later items, how would we add 2,100 pounds of car to a three hour operation for one's mother? Pounds and hours are totally incommensurable and cannot be added in any way whatsoever.

To resolve this difficulty economists translate each item of wealth into money terms by virtue of its price; car = $2,500, house = $30,000, food for one year = $2,000, painting = $501 college education 10,000, operation $ 1,000, record player $250. Now these money amounts can be added to give a total. And this is what Gross National Product is. It is the money value of all the wealth produced in the nation. But there is an assumption made in using not the item itself or its weight but its price. This is the assumption that the item is really worth the price paid for it. This assumption underlies all attempts to measure a nations wealth.

Is this assumption true? Well, on its behalf we can say one thing. If the man bought the car of his own free choice, then it is his judgement that it is worth at least $2,500. Otherwise why would he have paid that much for it? This is a reasonable assumption. He is the one who is using the car, and he is the one who is paying for it. If he thinks it is worth $2,500 to him, who are we to quarrel?

But this is a minimum figure. The car might very well be worth $4,000 to him. He pays only $2,500 because that is all he has to pay. Thus these figures going into GNP do not represent actual wealth; they represent minimum wealth. With regard to these figures we can say that that portion of the wealth of the country measured by them is at least the given figure. If, for example, because of labor difficulties the auto companies had to raise the prices of their cars while their quality was deteriorating (not an impossible event in this day and age), then the price of the car might go up to $3,000, and its value to our friend go down to $3,500. Our friend would still buy the car (albeit with much grumbling), but now the contribution to GNP made by that car would go up (because the price was higher) while the value would go down. The GNP would be higher because of this, but the wealth of the nation would be lower!

(The above paradox accurately describes what has happened on the New York subway system. The price of a subway ride is higher, and threatening to go still higher. Yet the service has deteriorated. New Yorkers may reflect as they suffer the indignities of the 5:00 PM rush that their distress is computed as a gain in Gross National Product.)

Furthermore, the assumption that the item is worth the price paid for it, while true after a fashion for the private sector of the economy, does not hold at all for the public sector. For example, a bridge may cost $10 million to build, but what is the value of that bridge to the motorists who use it? There is clearly some value — the time, gasoline and wear and tear saved by being able to go via the shorter route made possible by the bridge. But will these savings by all the motorists using the bridge over all the years of its life equal $10 million? There is simply no way of knowing. They may total $1 million, or they may total $20 million. Faced with a situation like this, economists simply throw up their hands and count the value of the bridge as equal to its cost. This, of course, is grossly in error and is done merely to get some kind of numerical value which can be added in to GNP. You or I could give them a number which would have as much meaning.

This use of cost to represent value has the following effect. If the contractor is honest and competent and builds the bridge for the scheduled $10 million, then the bridge counts as $10 million in GNP. But if he is dishonest and/or incompetent and requires $30 million to build the bridge, then it counts as $30 million in GNP. So in the public sector the greater the waste the greater the gain in GNP.

An example of this was the development of the F-111 fighter plane. As originally conceived by the Pentagon, it was to have swing wings so that the same plane could be used by both the Army and the Navy. Cost was to be $3.4 million/plane. If the job had been done according to specification, this would have been the addition to GNP from this source. But there were major cost overruns so that by 1967 the cost had risen to $9.5 million/ plane.69 And the engineering failures were so great that the plane wasnever made adaptable for the Navy. Because of this waste and incompetence the nation saw a greater addition to GNP from this source and a poorer quality product than if the original contracts had been met.

This of course brings up the whole question of whether military expenditures ought to be counted as part of GNP. The purpose of military expenditures is to provide for the defense of the nation. But if the President could negotiate a valid, enforceable treaty with the Communists which could guarantee our security, would not this treaty be as beneficial to the defense of the nation as all our armaments? Or if revolutions were to occur in the Communist world so that true republican forms of government arose in those areas and the new leaders established free elections and freedom of speech and unilaterally disarmed, would not this series of events be more beneficial to the security of the nation than all the money we spend on armaments each year? If such a treaty or such revolutions were to occur, the tremendous amount of labor and materials we spend on defense could be shifted over to produce things for people's use. Vast numbers of our citizenry would be better off because that portion of their tax money which now goes for bombs, tanks, and guns would go for products which truly improved their lot in the world.

Yet if such a change occurred, the benefit gained would not show up in GNP. The addition to GNP from goods to benefit People would counterbalance the decrease in GNP from the lower rate of defense spending. Peace treaties have no price and hence can not be counted in GNP.

Conversely, when a country goes to war, its real wealth goes down. People are poorer. On the one hand the public has been told that WW II pulled the country out of the Depression; on the other hand we are reminded of all the hardships of war. If an individual family finds that it is in a condition where the mother must work and yet there is not enough milk for the children, that family is regarded as poor. Yet that was the state of the nation in WW II. (There was a massive movement of women into the labor force; at the same time there were shortages of many items, including butter and milk.) Yet the economic indicators showed the country enjoying great prosperity during WW II — this at a time when the country was suffering a great loss in wealth. How then could these indicators accurately (or even approximately) measure wealth?


NOTE

  1. Robert Bleiberg, “Moment of Truth: It's Time the Nation Cut Its Losses on the TFX.” Barron's Sept. 18, 1967, p. 1.

This material is made available with the generous permission of Howard Katz (1931-2012).

Copyright © 1976 by Books in Focus, Inc. ISBN 0-916728-01-3