GDP: A Flawed Measurement of Economic Welfare - Essay Example

GDP: A Flawed Measurement of Economic Welfare I. Introduction The GDP has been the benchmark of economic policy for a prolonged period of time that most people perhaps regard it a kind of worldwide criterion. In fact, the GDP is merely a remnant of history, an artefact of another era. It developed from the challenges posed by the Depression and the Second World War, when the Western nations confronted economic realities exceptionally dissimilar from nowadays. Through history economic evaluation has emerged from the beliefs and conditions of the era. As Western economies transitioned from agriculture to production or manufacturing to finance and service, frameworks of evaluation commonly grew accordingly. However, during this century, and particularly since the war, the progressive process has drastically slowed. The market economy has persisted to alter fundamentally (Krane 2003). Specifically, it has infiltrated deeper and deeper into the domains of family, society, and natural environment that sometime appeared over its reach. Yet, even as this change has gathered speed, the way people evaluate economic wellbeing and development has been halted in place (ibid). The initial approximations of national accounts in Western nations were the ideas of one Thomas Petty, in England in 1665. Petty’s range was somewhat broad; he was attempting to determine the taxable capability of the nation. However, in France, a more restricted emphasis materialized. The dominant economic assumption was that of the Physiocrats, who claimed that agriculture was the genuine resource of a nation’s prosperity and wealth (Auty 2001). Unsurprisingly, their economic evaluation put emphasis on agricultural production. There was an immense multiplicity of perspectives, nevertheless, even in France. In England, a more developed country, Adam Smith introduced a more encompassing theory of national wealth that integrated the entire organization of manufactures as well (ibid). Yet, one of many significant points missed by his enthusiastic supporters is that Smith omitted what people refer nowadays the entertainment and service economic sectors, including government and lawyers. Such objectives might be valuable or otherwise, he stated. But all are absolutely “unproductive of any value” (Halstead & Rowe 2004, p. 1) since they don’t give impetus to a concrete product. That perspective was definitely questionable. But Smith was uttering an essential question, one that has relatively much vanished from economic schools of thought. “Is there a difference between mere monetary transactions and a genuine addition to a nation’s well-being?” (ibid) By the final stages of the nineteenth century England’s economic heart of prominence had changed remarkably from manufacturing to trade and commerce. In this novel economy Smith’s perceptions on national wealth started to squeeze; Alfred Marshall, who suggested what now referred to as neoclassical economics is, proclaimed that usefulness rather than concreteness, was the genuine criterion of production and prosperity. Fees demanded by lawyers, commissions, all the paper shambling of a preoccupied commercial economy, were basically no different from bags of tomatoes or truckloads of steel; the economic importance of a thing rest not in its nature but merely in its market price (Harvey 1989). This oppressing of national accounting to the lowest common denominator of price was to have widespread repercussions. It implies that every item of commerce was taken on to supplement to the national health simply by the reality, and to the degree, that it was generated and purchased. Simultaneously, it implied that only transactions concerning monetary value could count in national consideration. This abandoned two large domains, namely the purposes of family and community on the other end, and the natural environment on the other. Both are critical to economic wellbeing. Yet, since the services they carry out are external to the price structure, they have been unnoticeable in Western nations’ national reckoning (ibid). In 1931 an organization of government and private specialists were called upon to a congressional convention to respond to certain inquiries about the economy. But unluckily, they couldn’t answer the questions. The most current data that they have was from 1929, and they were undeveloped at that. In 1932, the final year of the Hoover Administration in the United States, the Senate requested the Commerce Department to organize complete estimates of the national income. Eventually, the department assigned a young economist named Simon Kuznets to the mission of designing a standard set of national accounts. These became the blueprint for what is referred to now as the GDP (Rowe 2002). II. Higher GDP, Greater Economic Welfare? Independently, the GDP tells extremely little. Merely a “measure of the total output (the dollar value of finished good and services), it assumes that everything produced is by definition ‘goods’” (Halstead & Rowe 2004, p. 2). It fails to discriminate between expenditures and benefits, between profitable and negative activities, or between sustainable and non-sustainable economies. Many of the nations’ fundamental measure of wellbeing operate like an estimating machine that adds up but unable to deduct. It treats everything that occurs in the market as a benefit for humanity, whereas neglecting everything that takes place external to the dimension of monetized exchange, apart from the significance to wellbeing (ibid). By the probing standard of the GDP, a nation’s economic champion is an incurable cancer patient who is enduring a costly marriage separation. The happiest even is natural calamities such as earthquake, typhoons, and hurricane. The most sought-after territory is a multibillion-dollar funded site. All these augment to the GDP, since they cause monetary value to shift directions. It is as if business maintained a balance sheet through simply summing up all transactions, regardless of the difference between income and expenses, or between assets and liabilities (Manila Bulletin 2007). Ironically, the more a nation exhausts its natural resources, the greater the leap of GDP. This defies basic accounting principles, in such a manner that it illustrates the reduction of capital as current income. No businessperson would create such an elementary inaccuracy. If a small firm drains an oil well in a locale replete with this natural resource, the locale obtains a liberal depletion stipend on its taxes, in acknowledgment of the loss. Yet, that very same drainage crops up as a gain to the nation in terms of GDP (The Washington Times 2007). For instance, if a nation drains its salmon population, this turns out as an economic growth in national books, until the fisheries disintegrate. Herman Daly, a former World Bank economist, claims that current national accounting structure views and treats the earth as a venture in insolvency (ibid). Include pollution to the balance sheet and nations will appear to be accomplishing better in terms of economic welfare. In reality, pollution comes up twice as an advantage: once if the factory using toxic chemicals, for instance, generates it as an offshoot, and recurrently when the nation expends billions of dollars to sanitize the toxic funded site that results. Moreover, the extra expenditures that surface as an outcome of that environmental depletion and ruin, such as medical bills accelerating from harmful air, also comes up as a gain in the GDP (Krane 2003). This type of accounting satisfies the idea that conserving natural reserves and safeguarding natural habitat must appear at the expense of the market or economy, since the outcome can be a diminishing GDP. That is comparable to saying that a resource for capital downgrading must arrive at the expense of trade and industry. Alternatively, a capital reserve is fundamental to guarantee the prospect of the business. To neglect that is to baffle simple borrowing or loaning from the future with real profit. Resource preservation operates similarly, but the perverse accounting of GDP conceals this essential reality (Harvey 1989). Moreover, GDP ignores the important role played by the social dimension, specifically, the economic contribution of households and communities. This is the sector where much of any nation’s significant work gets accomplished, from nurturing and caring for the younger and older generation to social work in its several forms. It is the nation’s social adhesive. Yet since no monetary values change in hands in this dimension, it is unseen to traditional economics. The GDP doesn’t matter it at all, which implies that the more of a nation’s families and communities turn down and commercialized service sector replaces their function, the more the GDP increases and the economic specialists merry (Halstead & Rowe 2004). These are just the more apparent dilemmas. There are several others, no less serious. The GDP absolutely discards the distribution of income, for instance, so that mammoth gains at the apex, as were established during the 1980s, seem as novel reward for all. It makes no difference between the individual in the stable technological occupation and the underemployed white-collar employee who has to labour two jobs at lesser compensation. The GDP treats free time and quality time with family the manner it treats basic human needs such as air and water: as possessing no importance at all (ibid). When the demand for a second occupation curtails the time available for the family or community, the GDP counts this loss as an economic leverage. Then there is the concern of obsessive-compulsive consumption. Free market conservatives are predisposed to attack detractors of the GDP as ‘elitists’. People purchase things because they crave for them, they claim, and who knows better that the individual themselves what supplements to wellbeing? It makes a fine wisecrack. Nearly half of, for instance, the United States’ drinking go beyond the limit of moderation, which is defined as two drinks a day. Credit card misuse has turned out to be invasive that domestic chapters of Debtors Anonymous conduct forty-five meetings every week in the San Francisco Bay zone alone (Rowe 2002). Almost 50 per cent of Americans believe themselves obese. If one takes into account the $32 billion diet business, the GDP becomes genuinely out of the ordinary. It includes the food that people fancy they didn’t consume, and then the billions they spend to drop the extra pounds that effect. The patient of a coronary by-pass turns out to be almost a symbol for the nation’s evaluation of development: dig in the cholesterol, shell out the consequences, and combine the two together and the economy progresses some more (Halstead & Rowe 2004, p. 3). The GDP is merely “a gross measure of market activity, of money changing hands.” It makes no differentiation at all between the pleasant and the unpleasant, or costs and benefits. On top of that, it considers only at the segment of reality that economists prefer to recognize, the segment involved in financial transactions. The significant economic functions accomplished in the household and social work sectors become completely uncounted. Consequently, the GDP merely conceals the collapse of the social system and the natural environment upon which the economy, and life itself, decisively rely on; worse, it in fact depicts such collapse as economic advantage (Aunty 2001). III. Conclusion Economists have expressed their opposition to new indicators primarily in philosophical considerations. An evaluation of national development must be technological and value-free, they maintain. Any effort to assess how the economy essentially influences people would imply extremely many theoretical explanations and attributions, exceptionally many value decisions concerning the things to include (Harvey 1989). Better to hang about on the hypothetical solid ground of the GDP, which for all its shortcomings has obtained an impression of tough empirical science. Impression regardless, the recent GDP is beyond from value-free. To abandon social and environmental costs drawn from the economic accounting does not prevent value decisions. Alternatively, it creates the immense value judgment that such elements as family collapse and misdeed, the ruin of farmland and the whole living things, underemployment and the reduction of leisure time, are valueless in the economic equilibrium. The reality is the GDP previously does place a subjective value on such aspects, a colossal nothing. The household and non-profit economies are where a nation’s most essential work, and the work that shapes people’s economic welfare most directly, are accomplished. Nurturing, socializing and caring of children and the older population, cleaning and restoring, contributing to vicinity organizations, all of these are completely discarded in the GDP if no monetary value shifts hands (Krane 2003). To prevail over this predicament, it must be included, among other things, the importance of domestic work outlined at the estimated tempo a family would have to compensate someone else to accomplish it. Therefore, based on the discussion, GDP is not an ideal measure of economic wellbeing. If country A has higher GDP than country B, it doesn’t necessarily imply that country A has greater economic wellbeing than country B. GDP, as far as the actual economy and the people’s economic welfare are concerned, is at flaw on all aspects of economic measurement. Works Cited Auty, R., 2001, Resource Abundance and Economic Development, Oxford: Oxford University Press. Halstead, T. & Rowe, J., 2004, If the GDP is Up Why is America Down?, The Atlantic Monthly , 59+. Harvey, A., 1989, The Econometric Analysis of Time Series, MA: The MIT Press. Krane, S., 2003, An Evaluation of Real GDP Forecasts, Economic Perspectives , 2+. Limitations of GDP Accounting, 2007, Manila Bulletin , NA. Rowe, J., 2002, Replace the GDP, Washington Monthly , 34+. The GDP, 2007, The Washington Times , A10. Read More