The Way GDP Describes One's Personal Economic Well-Being - Essay Example

Gross Domestic Product Gross domestic product (GDP), also known as gross domestic income, refers to the country’s total annual economic output. It isthe overall value of goods and services a country produces annually, excluding the foreign productivity of domestic firms but including domestic productivity of foreign firms according to Webster’s Dictionary of the New World College. The United States adopted the term GDP in 1991 as a measure of the economy, and defined it as the overall market value of the goods and services, the workers produce and the capital that is within a country’s borders over a given period of time which is usually one year (Bgsu, n.d). The term can be mathematically expressed as equal total investment, government and consumer expenditure, plus the exports value, minus the imports value. The GDP of a country can be determined using the following three approaches; which should all provide similar results; the output or product approach, the expenditure approach, and the income approach (Walter, 2000). The product approach is the most direct and totals the outputs of each category to come up with the total. Expenditure approach is guided by the principle that every product has to be purchased by an individual, thus people’s overall spending must equal total product value. Lastly, the income approach basically works on the rule that earnings of productive factors should be equal to their product value and it determines GDP by totaling all of the producers’ earnings. Personal Economic Well-Being Well being refers to the feeling of being happy, healthy and comfortable according to Kathleen and Thesia, (2005). However, this depends with what we do with it since it is evident that usually people may feel well in various different ways. In most cases, factors to be considered include social environment, surrounding (house), health and personal realization which include hobbies and work place, to determine well being. However, some people tend to think it is impossible to feel well with no swimming pool, a Porsche, or a ticket to travel round the world in a year. Thus, well being begins at the moment one has and can do what he thinks is fit for himself. Parts of well being can determine if you can have something or not same as the structural behavior determines the possibility of receiving something or being accepted to do so. Thus, one of the features of human’s well being is structural behavior. This term generally refers to a state of people having adequate resources to satisfy their needs. It can also be referred to fiscal freedom, whereby people have the freedom to donate when necessary as well as being independent and debtless. Some scholars have described the various forms in which private self has gradually become the government’s focus of intervention in the contemporary society. One way is through neo-liberalism which is a political philosophy related to free markets and minimal government involvement, directed towards the support of the enterprising citizens. One of the ecological economists by the name Robert Costanza noted that while quality life has been an implicit or explicit policy goal for along time, suitable measurement and definition have been indefinable. Link between GDP and Economic Wellbeing Household or personal income is generally used as the only paramount measure of the extent to which individuals are well off (Kathleen and Thesia, 2000). However, certain other factors also determine people’s well being according to Hagenaars and Bernard (1985). They gauge how people at the household level are fairing on and these include the satisfaction of the basic needs, control of consumer durables and housing and surrounding conditions. GDP is mostly used as an indicator of a country’s economy on the basis that all citizens of the country would gain from increased economic productivity of their country (Alan, Auerbach & Laurence, 1998). However, this should not be the case since GDP may go up while the earnings for most of its citizens may even decline. For example, from 1990 to 2006, the income of individual workers, in the United States working in the private industry and services went up by less than 0.5% annually while GDP improved by about 3.6% during the same period. One of the benefits of using GDP as a gauge of the living standards of the people is that it is widely, consistently and frequently calculated (Alan, Auerbach & Laurence, 1998). It is frequently measured such that most countries give information on GDP periodically therefore allowing users to mark trends regularly. This also allows countries to make comparisons making its definition rather consistent between countries. However, its major shortcoming is that it is not a gauge of the living standards of the people in the country, but aims at measuring the specific categories of economic activities in a given country. For instance, a country that exported 100% of its products and did not import anything would still record a higher GDP while the standard of living is very poor. GDP is the best used as an indicator for measuring the country’s economic activity and not the standard of living of its people. It is nether a tool for projecting the country’s economy. That is the reason as to why it does not measure the sustainability growth of a country. A country may gain a temporarily increased GDP by over-using its natural resources or by misappropriating investment. For instance, the citizens of Nauru achieved one of the highest annual incomes in the world through over-exploitation of the large phosphate deposits. However, since 1989, there has been a sharp decline in their standards of living as the supply has fallen short. Also, states rich in oil can maintain high GDPs which normally fall if the oil gets finished. Economic growth without environmental consideration can lead to greater expense on the clean up. GDP does not consider the difference in incomes between the poor and the rich (Bgsu, n.d). Nonetheless, many winning economists have rejected the benefit of unequal income as an aspect of improving economic growth in the long run. In reality, temporary increases in income disproportion may result in decrease in income inequality in the long run. One main disadvantage of approximating GDP growth in a given time is that there is a variation in the purchasing power of cash in varying amounts of goods and therefore deflation in the GDP figure leads to greater growth of GDP depending on the relative quantities and the basket of goods that were used to lower the GDP figure according to Alan, Auerbach and Laurence (1998). For example, for the last 80 years, the United States GDP per capita if calculated by the potatoes’ purchasing power did not considerably go up. However, if calculated by the eggs’ purchasing power, it went up several times. Therefore, economists evaluating several countries often employ a diverse basket of goods. GDP does not take into account the activities provided through the market like volunteer services and household production; thus, GDP is often understated. Volunteer work contributes nothing to GDP, but it was projected that it might have cost over one billion dollars for a business company to expand. Marilyn Waring highlighted that if a combined effort to include volunteer work was made, then it would unwrap prejudice of unpaid labor while at the same time providing political accountability and transparency. Also, GDP does not consider underground economy, whereby transactions which contribute to production such as tax omissions and illegal trade are not reported hence, making GDP to be undervalued as a measure of the standards of living (Alan, Auerbach & Laurence, 1998). GDP undervalues true economic growth by not changing for the new products and quality advancements (Jeremy, 2002). Even though currently computers are cheap and more powerful than those in the past, GDP only accounts for the monetary value and treats them as same. It is also hard to measure the introduction of new products accurately since GDP does not reflect it irregardless of the fact that it can raise the standard of living. For, instance, in 1900, the richest person could pay for standard goods such as cell phones and antibiotics that a common buyer can get today. Conclusion GDP which is the country’s total annual economic output does not describe the personal economic wellbeing of its citizens adequately. The country’s GDP might significantly rise but in turn its citizen’s living standards deteriorate. In fact, many critics have aired out their concerns over the ineffectiveness of GDP as a measure of national wealth. Frank Shostak, for instance stated that GDP framework cannot describe if the final products produced are a true reflection of the wealth consumption or the capital consumption. For example, if the government starts a project that does not add anything to the well being of its individual, GDP will refer to this as economic growth but in reality this is not the case. The efforts to describe a country’s wealth in monetary terms are childish as they degrade efforts to explain the riddles of the earth according to Steven, John and Donald (1986) Simon Kuznets, 1934, in his initial report directed to the US congress, said the nation’s welfare can be scarcely inferred from the calculation of the national income. In 1962, he said that there should be distinction between quality and quantity of growth, between returns and costs and between temporary and permanent changes. Therefore it is clear that a country’s GDP is note a true reflection of its economic well being. References Alan J. Auerbach & Laurence J. Kotlikoff 1998 (2nd ed.) Macroeconomics: an integrated approach, MIT Press. Bgsu (n.d) Gross Domestic Product: Overview, viewed 3rd March, 2010 http://www.business.bgsu.edu/Faculty_Staff/Hoag/information/SG17.pdf Hagenaars M. & Bernard M. (1985) "A Synthesis of Poverty Line Definitions," Review of Income and Wealth, Blackwell Publishing, vol. 31(2), pages 139-54, June. Jeremy J. Siegel (2002) Stocks for the long run: The definitive guide to financial market returns and long-term investment strategies (3rd ed.) McGraw-Hill Professional Publishers Kathleen S. & Thesia I. G. (2005) Economic Well-Being Based on Income, Consumer Expenditures and Personal Assessments of Minimal Needs, US Bureau of Labor Statistics Menno P. & Martin R. (2000) "Measuring Poverty Using Qualitative Perceptions of Consumption Adequacy," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 462-471, August. Steven J., John M. & Donald R. (1986) American Association for Public Opinion Research: Measuring Change in Personal Economic Well-Being, Public Opinion Quarterly 50:176-192 (1986). Walter J. W. (2000) Barrons business review series (3rd ed.), Barrons Educational Series. Read More