GDP Is Not Enough - Research Paper Example

? GDP Is Not Enough Austin Nelson Marymount Manhattan College The Gross domestic product has been used as a measure of economic growth and performance for a number of countries; the United States included. The GDP has always been criticized of not showing the real picture of economic performance of a nation due to its limitations. These limitations include poor measurement of non-traded products, difficulty in accounting for improvements in the product quality, and the fact that GDP does not include illegal activities which actually affect economic performance. Due to these shortcomings, economics have proposed a change of either supplementing the GDP or replacing it with another method of measuring economic performance. This paper provides an annotated bibliography for the topic GDP is not enough (Adam, 2009). Gross Domestic Product (GDP) refers to the net value of all final production of goods and services in a country. GDP is often measured and calculated in three ways: first, is summing up of all the incomes and profits received from goods and services produced in a country; second is summing up of all expenditures incurred in the production of goods and services i.e. adding up of money earned from exports and deducting all that is used on importation; lastly is summing up all the value added by capital and labor in situations where inputs are procured from other producers and converted into output. GPD accounts only for the flow experienced in an economy thus excluding stocks, wealth and capital investment as this do no account for direct financial transactions, where change of money occurs (Buxton, 2002). Gross Domestic product basically calculates the economic activities with nation’s borders while Gross National Product (GNP) is concerned with the gross income of the citizens in that country. GNP sums up interests, rates, rents, profits and dividends paid out by outsiders. Policy makers are often much interested with the economic activity level thus making GDP to be more preferred. Although not accurate in an extended period of time, GDP offers a complete snapshot of the economy. It offers a summary of the entire range of economic information into a single number, thus reflecting on comparative weaknesses and strengths of various economic sectors. It is a precise In most cases, an increase in economic growth is often accompanied by equal increase in both income and employment. GDP therefore seeks to estimate such changes in economic and social welfare. However, it can only give a precise figure of certain other contributing factors remain constant. Economic analysts believe that GDP reflects on the general welfare so precise enough to assume it as an equivalent measure on welfare. However, critics such as think tank Redefining Progress (discussed below) believe that GDP does not reflect concisely the total utility measures (Chien, 2010). Traditionally, economists have been using GDP measure to approximate the economic progress. An increases in GDP value meant the particular country is progressing. Consequently, a fall in GDP meant that the particular nation is rapidly ceding ground. From a strict arithmetical aspect, DGP offers a straight forward indicator to economic wellness. However to a common man, GDP statistics can be deceiving. To counter this ambiguity, Redefining Progress- social think tank came up with the Genuine Progress Indicator (GPI) in 1995. This idea was nurtures as an alternative to the convectional GDP as a parameter for estimating the economic and social wellbeing of a country. The two indicators are based on a common personal consumption data baseline. However, GPI unlike GDP gives adjustment factors and variables that represent both monetary and non monetary aspects of the country’s economy. The adjustment categories can be grouped into the following categories; Personal consumption: this baseline gives similar data input similar to what is used in GDP measurement. Income Distribution; under this, GPI is scaled upward when a higher percentage of a country’s income goes to the poor population. This increase in income gives real benefits to the poor households. Similarly GPI is lowered when the major share of a national wealth is dominated by the richer population. The value of the labor associated with these factors is often is always factored in calculation of GPI. The benefit of improved academic levels of the populace is equally factored in GPI calculation.Resource depletion: When natural environment is degraded by an economic activity, GDP just considers the monetary benefit associated with economic activity; GPI focuses at the blink future as a result of the economic activity. Increase in crime is costly to the economy in numerous ways such as, replacement of vandalized items, legal fee, medical fees and insurance costs. GPI regards this as negative to the economic growth. GDP also considers only the value of the economic activity associated with the pollution (Buxton, (2002). However, GPI focuses mostly at the negative impact of the above. . GDP considers costs such as medical insurance schemes, vehicle insurance, healthcare schemes and other costs as positive. However, GPI considers such costs as negative. Donor funding and money borrowed to bridge the budget deficit in a nation is viewed as negative by GPI, unless the borrowed money is used for investment and thus benefiting the nation. For instance a case where the foreigners invest in the US, their investment is deducted from what the US citizens have invested overseas. A five year average is used to gauge whether the country is growing to be a net borrower of financier. A figure that reflects net borrowing is often deducted from the GDP whereas a figure that shows a net investment if added up to the GDP figure (Vlahov, 2010). According to Haggart, (2000), GDP gives the market value of the final, current and domestic production over a particular time interval. This means that, GDP sums up all production activities in terms of their equivalent market value. This measure thus excludes the intermediate sales as only final production is considered. GDP as a measure of economic well-being includes government expenditure alongside other non revenue generating market transactions which are not beneficial to the societal welfare. A good example is military spending- although defense is crucial in providing an enabling environment for other economic activities to flourish, GDP does not value it on its own. According to Adam (2009), Gross Domestic Product gives a measure of economy thus showing how good or bad an economy is performing. However, GDP as economic measurement tool has some notable shortcomings which need to be addressed prior to the determination of a countries’ economic status. GDP accounts for transactions that occur in formal market place. However there are numerous non- market transactions which are cannot be accounted and thus do fail to be included in the GDP calculations, for instance, if a mechanic service his own private vehicle or a farmer gardening his farmer for subsistence consumption (Vlahov, 2010). These forms of transactions are never entered in the GDP calculations unlike the market transactions. In most countries over the past years, the average weekly working hours have been reduced considerably, for instance, in the years over in recent years, working hours per week have dropped considerably from 56 to a mere 36. In addition there has been a substantial increase in casual leaves, sick leaves, paternity and maternity leaves thus relieving the life of the working population. This leisure time only improves the performance of employees. However, incidentally that is just wasted time as it does not form part of GDP. It is also worth noting that although people are working less hours, more output is realized as a result of improved productivity and personal wellbeing of the society (Arnold, 2011). GDP is a quantitative rather than qualitative measure of product produced and services rendered. It does not capture the quality improvement of a product or service such as electronic and computers with more improved storage and processing capability are now available at cheap cost. This quality improvements leads to more satisfaction of consumers as they can now access superior products at nominal cost. Quality improvement has a great positive economic wellbeing but GDP measure does not recognize its impact. In every country, there is a parallel aspect of economy that exists with a degree of secrecy; popularly known as “black market”. The underground trade majorly deals with illegal merchandise and services such as gambling, prostitution, robbery, smuggling and so on. The people involved in such activities have a valid reason of operating under cover due to the prevailing government laws and regulations and thus their income is never monitored by the government hence never accounted for in calculation of the GDP. Other examples include the exchange of services such as a mechanic offering his services to his landlord in exchange of pardoning by the former. Hoag, (2006) , deduces that the increase and improvement of production of goods and services have a direct positive impact on GDP but the consequent negative environmental impacts are never put into considerations. The rise of industries leads to pollutions of the environment and thus negative effects on the society. The polluted environment is hazardous to human health and thus it reduces the average life expectancy of the particular population. The negative environmental impacts are never factored in while calculating GDP unless money is spent in countering increased pollution. The composition of a commercial product has a direct bearing on its well being because it reflected the impact to the society. GDP shows some inadequacy in address product composition during the estimation of the monetary value. For instance a book and weapon with the same monetary value are often considered the same in calculation of the GDP, thus ignoring the apparent importance of the book on societal wellbeing (Hoag, 2006). In terms of average income, GDP considers the total income in a region thus ignoring the most important aspect of income distribution which brings a lot of difference in peoples’ living standards. A case may be possible where 90 percent of the total income in an area is contributed by just 10 percent of the population. This shows that total income does not necessarily refer to distribution of output among a population. Higher GDP can be translated to better econmy and well being of the population; but in cases of uneven wealth distribution, the same can be interpreted as higher poverty levels. Per capita income is often calculated as measure of magnitude of total production, Based on the argument above, per capita income becomes a very inaccurate measure of the average economic performance. For instance if the gross output of a country increases by 4 percent, and over the same period the population of the same region increases by 5 percent, GDP measure will conclude this as an improvement in economic status of the country but in actual sense the per capita income has reduced and consequently leading to a decreased standards of living. Household income does not indicate the level of happiness, and just like GDP it does not promise a happy and satisfied life. There are a number of other factors that can greatly impact on societal wellbeing without necessarily boosting the GDP. This factors include; Peace and stability, better family relationship, decreased level of violence and robbery, and spiritual nourishment. Gross Domestic Product and Gross National product have been in use for estimating economic well being for about 60 years. As a measure of economic activity, GDP cannot be equaled. However due to its positive economic inclination, it has been treated more as a normative indicator for both social and economic well-being. All over the world, numerous indicators have been developed to address the need of covering the welfare of the society rather that their economic aspect only. Many of these programs seeks to address the shortcomings attributed to GDP which include sustainable development and welfare improvement, environmental degradation and pollution as well as quality of living standards. According to Chien, (2010), GDP fails to address sustainability the expected future GDP and also value for non- monetized economic activity. Gross Domestic Product does not distinguish less and more productive economic activities. In reality the method focuses on the end regardless of the means. In the past 10 years a number of economic indexes. This include; Quality of Life Index, Genuine Progress Indicator, and Human Development Index which majorly rely on existing national statistics or a by blending several observed data and direct surveys. Despites these indices government agencies, policy makers and academic institutions still use GDP figures as an indicator of economic prosperity. The news on media mostly talks of GDP figures together with future projections. The above shortcomings of GDP are just some of problems associated with GDP measure. Obviously, the figure calculated as a GDP measure should therefore never be relied upon as a precise economic growth assessment. It certainly has its positive applications; therefore it should not be abandoned altogether. Just like any other economic status indices, one need to be careful when applying the figure in instituting judgments on economic well being of a country. Annotated Bibliography Arnold, R. A. (2011). GDP and indicators of economic wellbeing. Retrieved from https://docs.google.com/viewer?a=v&q=cache:VwJLhmvo4CkJ:steadystate.org/ The author explains in details what economic well being entails. In addition, the author outlines the strengths and weaknesses of using the GDP and its IS-LM framework as a measure of economic performance. Adam, G. (2009). Shortcomings of GDP. Retrieved from http://www.soopertutorials.com/business/economics/3319-shortcoming-gdp.html This article discusses the various limitations of GDP as a measure of economic performance. Butts, D. (2002). Yet another note on benefits of nominal GDP targeting. Retrieved from http://delong.typepad.com/sdj/2011/10/yet-another-note-on-benefits-of-nominal-gdp-targeting-1.html This author book discusses the GDP in relation to politics, democracy, and corporations. Buxton, T. (2002). High GDP means economic growth, does it? Retrieved from http://www.investopedia.com/articles/economics/08/genuine-progress-indicator-GPI.asp#axzz1qCCjiWoy. The Author discusses how thee use of GDP has been effective in measuring the economic performance of Britain. Haggart, B. (2000). The gross domestic product and alternative economic and social indicators. Retrieved from http://publications.gc.ca/Collection-R/LoPBdP/BP/prb0022-e.htm This article discusses how GDP ignores so many variables that can actually prevent from function as good measure of economic growth. Chien, G. C. (2010). Gross domestic product: Is GDP a good measure of economic growth: Why or why not? Retrieved from http://www.quora.com/Gross-Domestic-Product/Is-GDP-a-good-measure-of-economic-growth-Why-or-why-not This author outlines some of the reasons why GDP is or is not a good measure of economic growth. Hoag, A. J. (2006). Economy and jobs watch: more weaknesses in GDP. Retrieved from http://www.ombwatch.org/node/1518 This article gives an overview of economics, the GDP and how the GDP has failed to factor in various variables in economic growth. Kennedy, R. (2012). Shortcomings of GDP in 1968. Retrieved from http://conversableeconomist.blogspot.com/2012/01/robert-kennedy-on-shortcomings-of-gdp.html This author explains the failures of GDP in 1968 and how they relate to its failures today. Nfreling, K. (2010). The shortcomings of GDP as a measure of economic growth. Retrived from http://hanseconomics.com/2012/01/29/the-shortcomings-of-gdp-as-a-measure-of-economic-growth/ This author outlines the failures of GDP throughout history from the period immediately after World War II. Vlahov, D. (2010). The “sparky commission” critiques GDP as measure of well-being. Retrived from http://blog-pfm.imf.org/pfmblog/2010/04/the-sarkozy-commission-critiques-gdp-as-a-measure-of-wellbeing.html This author explores the negative assumptions of GDP in comparing satisfaction and economic growth among nations as its weakness in measuring economic performance. Read More