Innovative Thinking and Gross Domestic Product - Essay Example

In many academic fields tradition becomes a barrier that limits innovative thinking. In the field of economy an economic indicator that has been utilized a metric that measured both economic growth and well being is gross domestic product (GDP). Gross domestic product can be defined as the total market value of all final goods and services produced in a country in a given year; it is equal to the total consumer consumption, investment and governmental spending, plus the value of exports minus imports (Investorswords, 2009). GDP has been around for centuries and it is considered the most recognized economic metric. The problem with GDP is that the metric was originally designed to recognized economic activity and it was never meant to be utilized as a standard to determine the well being of a society. This paper analyses gross domestic product in order to determine its functionality and ways to improve the metric so it can become a more suitable indicator of social progress and well being. Gross domestic product is an economic metric that is recognized by the entire international community. Since its utilization started centuries ago there is a tremendous amount of historical data about the GDP of different nations. The problem with the utilization of this metric for the purposes of measuring well-being is that the variables included in the formula to calculate gross domestic product have to do primarily with spending of either the public or private sector. The amount of money spend within a microeconomic system is not really a good determinant of the well being of a society. Well-being refers to the quality of life of a society which includes aspects such as freedom, happiness, environmental health, abundance of natural resources, and innovation (Wordiq, 2009). People expect from its governmental institution for them to be aware of the actual needs in order to improve their well being. In order for that to occur political leaders must be aware of the flaws GDP has when the metric is used to determine the well being of a society. Gross domestic product is not a good indicator to determine well being. In order to improve the representation of the metric without changing its integrity economist often prefer to display the total in terms of per capita denominations. Gross domestic product per capita can be better to compare the wealth within a specific country. We must recognize that wealth is important, but not the only factor that determines well-being. In recent years statisticians have gone a step further in order to improve GDP. They created an alternate economic metric called GPI which utilizes GDP as the basis from which other variables of social and environmental value are added and subtracted. Variables such as environmental, distributional, health and welfare should be taken into account when calculating gross domestic product. Environmental factors and issues have a tremendous impact in the quality of life of a nation. For example the lack of water in Sub-Saharan Africa is a factor that is lowering the quality of life of the inhabitants of the region. A comparison that will show the concept more clearly is the different between Brazil and Japan. Brazil has an abundance of natural resources, while Japan doesn’t which means that Brazil would have an addition while Japan would have a deduction is GPD included environmental factors. The health system of country increases the quality of life of the people. In the United States people can afford basic healthcare, but in Peru due to rampant poverty the people can afford basic which decreases the quality of life of the inhabitants of that region. The best proven way to adjust gross domestic product to better measure well being is to follow the framework utilized to calculate genuine progress index. The table below shows the variables that are added or subtracted from GDP in a GPI calculation. Crime and family breakdown Subtract Household and volunteer work Add Income distribution Add Resource depletion Subtract Pollution Subtract Long term environmental damage Subtract Changes in leisure time Add Defensive expenditures Subtract Lifespan of consumer durables & public infrastructure Add Dependence of foreign assets Subtract (Unm). Rising criminality lower the quality of life of the people because they are constantly worried they might be the next victim of a crime wave. The work of housewife and other volunteering work improve our society as a whole. Pollution and environmental damage hurts the ecosystem. When a person is able to enjoy more time with family and doing hobbies and favorite pastimes the person’s quality of life improved. Money spent on wars such as the money going toward the Iraq War on Terror lowers the quality of life of the citizens. Better schools and roads increase the quality of life of people, while borrowing money from foreign sources does not. If we did not need them in order to determine well-being the utilization of some of these variables might be confusing and could distort the metric. For example a social variable included in the GPI formula is divorce. It claims divorce is detrimental, but in reality is divorce such a bad thing. Prior to the divorce there were problems in the matrimony that was lowering the happiness of a couple. The divorce was the solution that solved the domestic problem. Income distribution is another variable that could be misinterpreted. In communism nations such as China there is greater income distribution than in the United States, but other political variables are causing the Chinese to while limited human rights in comparison with US citizens. Changes in leisure time are another variable that can cause problems because if a person goes unemployed his/her leisure time will increase at the expense of not having any regular income. For me personally the academic community should start to pay more attention to alternative such as GPI instead of traditional gross domestic product metrics. The gross domestic product simply does not have the capacity to truly evaluate the standard of living of a nation due to the fact that its scope is limited to expenditure. The GPI adds social and environmental elements which provide a more complete view of the socio-economical status of a nation. Resource depletion, pollution, and long term environmental damage are three variables included in the GPI that provide a great picture of a country’s environmental well being. Two other alternative indexes that can be used to evaluate the well-being of a country are ecological footprint and human development index. The United Nations has set a goal that by 2011 it will have standard environmental accounts. Green initiatives and alternative fuel systems are beginning to have major impact in the everyday life of people. In the United States in late 2010 a vehicle coming out called the Volt will provide its users with an amazing 230 miles per gallon. In order for the governments around the world to better evaluate the needs of its people they must move away from using gross domestic product as an indicator of well being. Three alternatives are genuine progress indicator, human development index, and ecological footprint. Works Cited Page Investorwords.com (2009). “Gross Domestic Product.” 23 August 2009. Unm.edu. “What is Wrong with the GDP as a Measure of Progress?” 23 August 2009. Wordiq.com. 2009. “Well-being.” 22 August 2009. Read More