Measurement of GDP and National Income - Assignment Example

Measurement of GDP and National Income The Gross Domestic Product or National Income of a country may be measured by keeping a number of aspects in mind. Most of them include the level of growth, equality and stability that an economy is facing, the distribution of income and wealth in the economy, as well as other factors like the role and management of private and public sector firms and the kind of transparency that is involved in their dealings. However, there is a line drawn somewhere to the length to which GDP can be measured as an indicator for the well being of a nation or the kind of happiness that is contained within the nation. The reasons for the same have been discussed in the paper to great length, the ultimate answer to the question being that GDP is not the only key aspect that helps in measuring the welfare or happiness of a nation and that there is more to that. Keywords: GDP, welfare, happiness, economy, wealth. GDP as a Measure of Happiness and Welfare Gross Domestic Product is a value of all the final goods and services that are produced in domestic territory of an economy, within a single accounting year. This is used as a measurement for finding out the different levels of growth in an economy. Not only that, but the GDP is used to compare the growth and development of one economy with another as well. However, with time, many economists have begun trying to find out the happiness index faced by the citizens of a country, with the help of the GDP. However, they fail to pose the following questions; what is the relationship between GDP and welfare? Can GDP be regarded as a good index of welfare among the people of a country? Or is it simply a measure for finding out the kind of growth and development the economy has undergone, not taking into account the actual distribution of wealth? While looking at the figures of per capita income and national income of a country on the whole, one may find that the country is prospering very well and has achieved growing levels of independency when it comes to its market segments and trade related areas. The country might be doing really well in almost all fields – right from the primary to the tertiary sector. But just because something looks good from the outside, it cannot be judged inside as well, can it? In simple terms, the capacity to purchase goods and services is what makes people feel satisfied. However, this capacity or purchasing power is available to the people of a nation on the basis of their incomes. If they have low incomes, then they are able to afford lesser and vice versa. The happiness index of a person thus, depends on the kind of satisfaction he is able to achieve, which in turn, as discussed above, is a direct reaction to the level of income earned by him. In this case, the GDP cannot be measured in terms of the number of goods and services sold in an economy in a year, but by the level of distribution of income within the country which in turn affects the number of goods and services purchased by different sections of society within a year. Therefore, the use of goods and services by different people in an economy is what contributes to their well being, and not just the GDP alone. The greater the magnitude of the GDP, the greater the welfare of the people, was what was earlier believed by most economists. However, with more development and consumerism all around the world, with people having higher power and choices in order to utilize resources to satisfy their needs and wants, the GDP itself poses very stark limitations to the kind of measurement it can hope to provide to measuring an index of welfare of the nation. (Osberg, Lars and Sharpe, Andrew) In order to understand this argument better, one needs to delve into the levels of distribution of income within a nation or an economy. The distribution of wealth is not uniform in most economies, may they be developed or developing ones. There is always a clear demarcation between the haves and the have not’s; the richer section of society as compared to the poorer one. It is true that a rise in the level of income of the people in a country leads to an overall rise in the GDP; however, does this go to show the kind of distribution of income or wealth that takes place on a more localised level? The answer is a rhetoric one. Welfare cannot be measured by looking at an overall rise in the GDP of a country because it could also mean that the gap between the rich and poor is just going on increasing despite the increase in the overall GDP of the country. This does not help to better society, and in fact can even lead to reducing the level of welfare that the people within an economy possess. The economy of the United Kingdom faced a reduction of 0.6% in its final quarter of the GDP in 2010. This was later blamed on consumer expenditure decreasing, along with the usual declining performance shown by the various sectors of the economy. This helps to show how the consumers have lesser purchasing power, leading to a fall in the total GDP of the UK. The outputs from various industries in the UK also fell according to reports leading to an ultimate fall in the GDP of the country. (Kollewe, Julia) However, this alone is not enough to measure the level of welfare within the economy. This is because it is also possible that welfare of the people might not have reduced despite the obvious decline in the level of GDP. GDP also does not give any value to leisure. Leisure is an intangible item that is enjoyed by most people, the idea being that the richer sections of society cut down on their work as their income or level of growth increases, and enjoy certain leisure values which lead to a reduction in the overall output of production or wealth. This value of leisure is further not accounted for in the calculation of the GDP and indicates that just because a society works harder, it is not enough to increase its well being. Its GDP might rise, but the happiness level might not. GDP also does not count any kind of non monetary transactions or illegal activities. Mothers providing services to their children and looking after homes and families, volunteers helping out people in need in order to help them live a better lifestyle, relief workers helping disaster stricken areas – all these aspects lead to a better life for many people, however are not accounted for in the GDP of a nation because they are non monetary in nature and are not adding to any value of creation of goods and services. Despite this, these aspects help to raise the level of welfare faced by a country, but not in the face of the GDP. Furthermore, a black economy created by underground and illegal activities remains unaccounted for or unreported by different sectors of the society and are thus not counted in the final estimation of the GDP. The GDP of a nation does not include assets as well. This is a bit of a surprise because this measurement includes any kind of creation of goods and services; however, it gives a very incomplete view of any economy by not showing a true picture of all the assets that have been created in it, and thus it does not make sense to understand how assets are not included despite them raising the level of welfare among the people. (2007) It is common knowledge that building assets lies in the interest of the citizens of a country; for example, reconstructing buildings and homes after a natural disaster strikes, building public utilities in cities and towns etc. All these help to improve the lives of people and make them more substantial, but are not included in the GDP and thus do not account for the happiness that people face. (Deutsche Bank Research) In conclusion, the GDP of a country is based on the measurement a number of aspects but in reality is far from being based on the level of happiness or welfare that people face. This is because it does not take into account a number of aspects of people’s lives as discussed above. It does not show a clear picture of the distribution of wealth within an economy either and thus, does not help to ascertain the actual growth or decline in the welfare of the common people. With the help of the GDP of the United Kingdom, an example has been taken to prove the same as well. Therefore, the happiness index of a person cannot be measured by taking into account the number of goods and services produced within an economy, but by the number of goods and services he is able to purchase, to satisfy his needs and thus create happiness or bring about welfare. References Osberg, Lars and Sharpe, Andrew. Comparisons of Trends in GDP and Economic Well-being – the Impact of Social Capital. Accessed 3 April 2011. Retrieved from http://www.oecd.org/dataoecd/5/32/1824740.pdf (2007). Issues With GDP as a Measure of Well Being. Accessed 3 April 2011. Retrieved from http://fatknowledge.blogspot.com/2007/08/issues-with-gdp-as-measure-of-well.html Deutsche Bank Research. (2006) Measures of Well Being. 3 April 2011. Retrieved from http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000202587.pdf Kollewe, Julia. (2011) UK Economy contracted by 0.6% in last three months of 2010. 3 April 2011. Retrieved from http://www.guardian.co.uk/business/2011/feb/25/uk-economy-contracted-by-0-point-6-percent Read More