Economic Growth Measurement Models - Term Paper Example

Economic Growth Models YourFirst YourLast Economic Growth Measurement Models The economic measure of real GDP per capita serves as an important element in assessing the position of an economy in the long run. This measure is additionally used by countries to compare the level of economic activity about other countries within the same economic zone. However, in the recent past, GDP as a measure of economic activity has come under sharp criticism for not putting into consideration other various significant aspects of the economy. A lot of extensive literature, both empirical and theoretical has been prepared by various notable scholars in which corrections to the GDP model of measuring economic growth have been made. In their notable works, famous economic thinkers such as Mishan (1967), Scitovsky (1976) and Arrow et al. (1995) have critiqued GDP, arguing that it is a significant mathematical measure, but not a comprehensive measure of the economic activity of a nation (Kitov, n.d.). In the recent past, GDP economic measure has been considered equal to the social welfare of society. It is evident with the recent adoption of the term "standard of living", used synonymously with GDP. However, this relationship is not buoyed by any significant macroeconomic concept, but has become a habit in the recent past. What is conceivably utmost conspicuous is that a huge bulk of reporters and legislators, irrespective of their party-political inclinations, make very credulous declarations about GDP (vintrova, n.d.). It is therefore not astounding then that we see the majority of people in the world prefer economic growth in terms of GDP growth. The same has been supported by an obvious emphasis on GDP growth by global institutions such as the OECD and IMF. Numerous items and events in this life cannot be assessed through GDP, but they are measurable using the cadent of education, health, clean environment, social welfare, freedom and many others. A famous economist started the process of distinguishing the commodities that are comprised in the GDP measure and the capabilities that are omitted from it. His efforts, buoyed by his colleagues efforts led to the notable discoveries of techniques of supplanting GDP. There are various flaws associated with the GDP measure of economic growth. Key among them; it is reported that GDP measures average costs rather than the benefits that emanate from the market operations. It is also said that GDP leaves out many external costs associated with the country’s economic growth. In the years between 1950 and 1965, a negative mean welfare trend was experienced in numerous OECD (Organization for Economic Cooperation and Development) western nations. This trend was recorded amid positive GDP growth rates for these countries (Guagliano & Mantovani, n.d.). According to the threshold theory, the cost of growth surpasses the realized benefits beyond a certain threshold income level. Therefore, the GDP measure of accumulating all the individual incomes is quite not an appropriate measure of the level of individual welfare because it is dependent on various income-dependent elements. GDP is therefore not a good measure of the social welfare; neither is it a sufficient indicator of the same. Another factor concerning welfare measurement is that people usually get adapted to changes in the environment or circumstances quite fast, therefore returning to the former baseline level of the well-being after the temporary change. In the GDP measurement, it does not capture the changes and the occurrence of the adaptation. Another significant factor is that GDP per capita measurement embodies normal incomes, neglecting the changes in the income distribution trends. This measure, therefore, contradicts the orthodox economists theories of the reduction in marginal utility levels with decreasing levels of income. Additionally, the GDP measure negates the capture of income contrasts and competitiveness, typified by the purchase of status goods. In this case, the scarcity of status makes the rivalry be a zero-sum game. In such cases, there is a possibility that GDP estimations may misjudge welfare growth. Any activities outside the conventional setting of the marketplace are not accounted for in the GDP measure because it disregards certain informal events that change the individual welfare. This fact is relevant to both the developed and third world countries. For instance, GDP disregards childcare improvement efforts and charitable works that improve the plight of the poor. Therefore, GDP is prone to overestimating the impact of the welfare of the significant changes that relate to changeovers from informal sectors to formal sectors. Finally, a significant subsection of unpriced economic consequences is related to economic resources delivered by nature and environmental externalities. The current prices of the goods and services as appropriated by the market therefore inadequately mirror social costs, leading to a miscalculation of the social welfare using the GDP per capita. Elements such as costs associated with environmental damage do not find their way into the GDP. It also fails to incorporate the natural depreciation of capital goods besides to changes in the environment and the reductions in supplies of the resources. Given the various shortcomings of the GDP measure of the level of economic growth, the following alternative indicators that are based on a corrected measure of GDP per capita are suggested as alternatives of GDP per capita. Index of Sustainable Economic Welfare (ISEW) and General Progress Indicator (GPI) The Index of Sustainable Economic Welfare or ISEW is an economic indicator derived from a correction of the regular GDP. It is developed for the repair of some significant flaws through addition or subtraction of some of the incompletely calculated values from GDP (Lawn, 2003). The ISEW intends to measure the levels of consumption of all services directly associated with human welfare. ISEW adds all the GDP services that are omitted in its calculation while removing all the GDP sections that are not direct providers of services to the users or the consumers. Generally, ISEW takes into account all the benefits of economic activities to the customers. Additionally, ISEW contains rectifications that neutralize income disparities and the unsustainability of all consumption as well as production. In addition, ISEW method adjusts the GDP for goods and services not tradable in the market, such as household chores and other costs associated with the protection of the environment and repair, such as the expenses of road accidents, health expenses and the expenses related to urbanization. Others include the decrease of future welfare brought about by current production such as air and soil erosion and damage to the ozone layer. The costs of maintaining the current level of social welfare such as the costs of advertising and commuting are also added to the computation and the levels of inequality between employees and between both genders. Conversely, GPI diverges slightly from the ISEW measure within some particular sections of corrections encompassed. Significant extra classifications that the GPI modifies for are charitable labor, delinquency, marriage separation, leisure-time loss, joblessness and ozone layer damage. Numerous applications reveal that while GDP adopts a rising pattern, the ISEW displays an unceasing or even a declining trend after a certain period. The sequential dividing line differs from one country to the other. Significant explanations for this de-linking of ISEW and GDP per capita have been a switch of casual domestic production by amenities offered by the market, for instance, childcare support, enlarged inequality, natural assets exhaustion and the rise of the worlds conservational issues such as global warming and the loss of bio-diversity. The two measures, GPI, and ISEW propose that the expenses of economic growth currently overshadow the gains, resulting in growth that is regarded uneconomic. Sustainable GDP Sustainable GDP also referred to as Green GDP originates from real GDP per capita measures but concentrates completely on external environmental factors and the depletion of the natural resource. Corrections are based on reproducible economic and environmental bases. The concepts applied are dependent on theories of welfare economics. Notable externalities include water, air and soil pollution and degradation, natural resources depletion, loss of biodiversity and the production and release of harmful toxins to the air. Key measures using the sustainable GDP model is the SNI (Sustainable National Income) model adopted by the Dutch. The model reflects the fundamental understanding that people are better off if certain important environmental functionalities remain operational. The SNI method employs a general notion model that assesses the effects of affecting sustainability limitations on the national income (Vaghefi, Siwar & Aziz, 2015). With this model, many primary areas of concern have been identified. They include the ozone layer depletion; climatic changes; marine pollution; soil contamination; acidification among others. This method not only embodies to some extent a purported strong sustainability viewpoint, for instance, the safeguarding of distinct forms of natural capital, as the method does not give room for any compromises between environmental subjects nor swaps between natural capital and economic capital. Nonetheless, the method acknowledging the worth of environmental ruin as being equivalent to the costs of conservation has analyzed this, arguing rather in favor of a user cost technique that leads to a bigger viable income value, where the variance would be dependent on the rate of depleting the natural resources. While relating the three adjusted measures of GDP, it is apparently clear that the initial measures have the benefits of considering the general equipoise effects of the alterations, but the drawback of confining itself to natural assets and environmental resources issues. GPI and ISEW adjust for a bigger selection of the imperfections within the measure of GDP, although in a restricted way that is likely to include varying adjustments (Vaghefi, Siwar & Aziz, 2015). Whats more, the results of the SNI are delicate to the precise measurement of the sustainability circumstance for every environmental element, as the marginal decreasing expenses are rapidly increasing for small values of depletion or the use of the resources. The ISEW pointer rectifies for the economic cost of environmental destruction, which is different from needing sustainable usage of environmental utilities, as destruction reward does not involve repair of ecological functions. Accordingly, SNI and ISEW have rather diverse understandings. References Guagliano, C., & Mantovani, C. Real-Time Evaluation of GDP in Some Eurozone Countries. SSRN Journal. doi:10.2139/ssrn.2457975 Kitov, I. Real GDP Per Capita in Developed Countries. SSRN Journal. doi:10.2139/ssrn.886664 Lawn, P. (2003). A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and other related indexes. Ecological Economics, 44(1), 105-118. doi:10.1016/s0921-8009(02)00258-6 Vaghefi, N., Siwar, C., & Aziz, S. (2015). Green GDP and Sustainable Development in Malaysia. Curr World Environ, 10(1), 01-08. doi:10.12944/cwe.10.1.01 vintrova, r. What GDP does not Reveal in Analyses of Economic Growth and Real Convergence. SSRN Journal. doi:10.2139/ssrn.874727 Read More