Is Gross Domestic Product a Good Measure of Wealth and Well-Being - Essay Example

? Is Gross Domestic Product (GDP) a good measure of wealth and well-being? Contents Contents 2 Introduction 3 GDP as an economic indicator 3 Defects in GDP as a measure of the well-being of the economy 4 Subjective well-being of the nation 6 Alternative Measures of Economic wellbeing 6 Conclusion 7 References 9 Bibliography 10 Introduction The Gross Domestic Product of a country is the sum of the market values of all the goods and services that are produced during a given span of time. In most of the countries the standard of living of the people are determined by the per-capital GDP of the nation. The growth of any country is also determined by the growth rate of GDP. Thus the Gross Domestic Product of a country is the determinant of the well being of the economy. The opinion of economists have varied on this issue regarding the considerable of the GDP is the appropriate measure to understand the well-being of the nation. While most of the economists have relied on this economic indicator as the main determinant of the standard of living, the others have differed stating that the other intangible and tangible factors like education, health as well as ecological environment to be important factors as well. Simon Kuznets who framed the term GDP even warned that the measure is not an appropriate indicator of the well-being of the nation (Kuznets, 1934). Thus is clear that the GDP was never devised to measure the well-being of nations. With the occurrence of the Bretton Woods conference this measure started being used widely in most of the nations of the world since 1944. GDP as an economic indicator The Gross Domestic Product of a country is the sum of the goods and services of the country taken at the market value. In order to understand the concept of GDP it is important to know how the GDP of a nation is arrived at (Landefeld, 2008). There are a variety of ways in which the GDP of a country can be measured. The product approach measures GDP by summing the total production of all the enterprises during a definite span of time. Thus the value added of all the final products in a year minus the sum of the value added of the intermediate products gives the GDP of the economy. On the other hand, the expenditure approach considers the sum of the aggregate consumption expenditure, investment expenditure, government expenditure as well as the net exports of the economy. The circular flow diagram provides an idea about the income and expenditure flow in the economy that takes place involving the individuals, firms as well as the government. Therefore GDP measures the flow of the goods and the services that takes place in an economy. The income approach however calculates the sum of the total income of the individuals the firms as well as the government in the economy. From the various approaches it is clear that during the calculation of the GDP the monetary values are taken and hence no other intangible aspect could be captured by the GDP. In all these cases only the computation of the However in most cases it is considered that if the economic condition of the people improves the people of the economy would be better off. Thus it is not an ideal measure of the standard of living of the economy. Defects in GDP as a measure of the well-being of the economy The economic system is a subsystem of a larger system that drives the world. There are ecological, political as well as social systems which are intertwined. The effects of each of these systems influence each other and one cannot be thought of independently without thinking about the other. The economic system in a society can run only in connection with the other systems and depends on the other systems to a large extent. For example, in order to carry out the production in a factory system it is important to take the help of the natural resources as well as the human capital. Along with that the incorporation of the knowhow is also important. Hence the entire economic activity of production needs the intangible resources along with the tangible resources. Another important reason for the concern regarding considering GDP is that the depletion of natural resources as a negative aspect is not taken into account. In fact, the GDP would encourage the people to use more of the natural resources and add to the total production of the economy. But nothing is thought of about the exhaustion of the resources. Thus the depletion of the resources would be taking place in a faster way compared to the process of the renewal. With the increase in the economic activities the world is facing degradation of the eco systems. Thus the services that the present generation is getting would not be available for the next generation out of the natural resources. For example the wood that is obtained by cutting down the forests would provide wood for furniture. This production process would take place within a year and hence it would be added to the GDP of a particular year. However, the time that will be taken for the tree to grow would be for a much longer period. Thus the environmental depletion is taking place at a faster rate. The GDP does not take into consideration these negative effects that would hamper the economic growth in the long-run. One of the most important aspects of considering the GDP is the threshold effect. It is said that at the initial levels with the increase in the level of GDP the standard of living of the people increases. This simultaneous increase in the GDP and the well being increases till a certain level beyond which it reaches a plateau (Max-Neef, 1995). After this level even though the GDP increases the well being of the economy would not increase unless the more important aspects are taken care of. From this level the level of inequality in the economy would increase and there would be loss of the natural capital. Subjective well-being of the nation In order to analyse the quality of life it is important to understand the fundamental elements that are essential for the well being of the population. These elements are essential for the progress of the nations despite having strong economic fundamentals. Health and happiness are the key elements for the progress of the nations. Most of the policymakers of a nation focus on the monetary aspect and hence ignore these non-material elements. Money in the economy is a very important element but it is only a means that can be used to achieve the higher ends of life like getting the right healthcare as well as getting the basic necessities that are important for achieving the happiness for the individuals (Daly and Cobb, 1994). The health indices, the education indices as well as the other indicators need to be incorporated to a unified index that would be able to reflect the ideal standard of the living of the people of a nation. Alternative Measures of Economic wellbeing From the above discussion it clear that GDP is the indicator of the economic quantity but it does not consider the qualitative aspect of the economy. The environmental and the social well-being are completely ignored in the analysis. The Human Development Index which was created by the economists Amartya Sen and Mahbub ul Haq, was published by the United Nations Development Programme. This index is considered to be one of the most appropriate indicators that take into consideration the life expectancy and education along with the income of the population. These three dimensions are essential for the development of a country. The life expectancy of the individuals would to some extent reflect how much the people are leading a healthy life in a nation. On the other hand the education level would be determined from the enrolment rates in the economy and the level of literacy in an economy. For the standard of living however the gross domestic product is being considered. However, the defect in this particular measure is that it ignores the ecological aspect of the world and does not account for the environmental degradation (Victor, 2008). The Genuine Progress Indicator is also one of the most important measures that reflect the sustainability in the economic welfare. This particular measure incorporates the data of personal consumption along with the information on the distribution of income, the money value of the work that is carried out in the day to day household chores, any kind of voluntary work carried out by the people involved in charity. While doing this the adverse items like the cost that is incurred due to crime and pollution in the society as well as the other externality situations are subtracted from the measure to give a correct indication of the economic wellbeing. The Ecological Footprint Index of an economy is another measure developed by the Global Footprint network that considers the amount of land as well as water area that is required for the production of the resources. This is because for any kind of economic production to undertake it is essential to use the natural capital that a country is endowed with. Therefore the capacity of a country to recycle and reuse the natural resources is an issue of importance in this index. The New Economics Foundation was instrumental in the preparation of the Happy Planet Index which is used for the measurement of the ecological efficiency of the wellbeing of the human beings. This index generally considers the elements of life satisfaction, life expectancy at birth and the ecological footprint. Conclusion The various indicators that have been talked about in the above sections show that all of them represent composite indices that which incorporate more than one variable. In most of the cases the variables other than the economic variables of income or in equality are the intangible variables. The Millennium Development goals formulated by the United Nations set eight objectives that would improve the quality of living of the member nations (UNDP, 1990). Most of these goals inclined on the intangible aspects of life like the reduction of the hunger and poverty, achievement of a minimum level of education for all the children in a society and, removal of any discrimination between genders, reduction in the mortality rates of the children, prevention and eradication of incurable and infectious diseases as well as bringing about a sustainability in the environment. Therefore it is important for the people to take care of these needs in the countries. However, another important point should not be ignored in this regard. These goals can be achieved in a successful manner only if the economic condition of the country is stable unless economic well being is present these higher goals cannot be achieved. Thus a more practical index like the Human Development Index should be considered while declaring the standard of living of the economy by the policy makers. References Victor, P. 2008. Managing without Growth: Slower by Design, Not Disaster. Northampton: Edward Elgar Publishing. p. 260 Landefeld, J. S. et al. 2008. Taking the Pulse of the Economy. Journal of Economic Perspectives, 22(2): 193-216. Daly, H. and Cobb, J. B. 1994. For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future. Boston: Beacon Press. Kuznets, S. 1934. National Income 1929–1932. A report to the U.S. Senate, 73rd Congress, 2nd Session.Washington, DC. US Government Printing Office. Max-Neef, M. 1995. Economic growth and quality of life: a threshold hypothesis. Ecological Economics 15(2): 115–118. UN Development Program. 1990. Human Development Report: Overview. New York: Oxford University Press. Bibliography England, R. W. 1998. Measurement of social well-being: alternatives to gross domestic product. Ecological Economics, 25: 89–103. Inglehart, R. 1997. Modernization and Postmodernization: Cultural, Economic, and Political Change in 43 Societies. Princeton, New Jersey: Princeton University Press. Commission on Growth and Development. 2008. The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington, DC: World Bank. McKibben, B. 2007. Deep Economy: The Wealth of Communities and the Durable Future. New York: Time Books. Read More