Ways to Make GDP a Better Measure of Social Welfare - Essay Example

Macrowritten1 Table of Contents Nominal or Real GDP 3 GDP Inadequate as a Measure of Social Welfare 4 Ways to make GDP a better measure of Social Welfare 5 Computation of Real GDP 6 The performance of the U.S. economy over the period 1989–1991 7 References 8 Bibliography 9 Nominal or Real GDP Gross Domestic Product (GDP) is the measure or the value of all the final goods and services that are produced by the economy of a country in a particular year. The nominal value of the money is used as a common denominator in order to add up diverse output into a meaningful total. Since, money is used as a measure in market value, the comparison of market value of GDP from year to year becomes complicated in response to inflation or deflation. To make it easier in calculation, GDP is deflated when prices rise and inflated when prices fall (Experimental Economics Centre, 2006). Nominal GDP (unadjusted) is based upon the prices of the products and services produced in a year and are not inflated or deflated. Real GDP (adjusted) is based on the prices of the products and services produced in a year that have been adjusted with inflation and deflation to perfectly predict the decrease or increase in production for comparison of the economic development from year to year. It is calculated in relation to price index of a given particular year (Experimental Economics Centre, 2006). For economic policy makers, real GDP hold enhanced importance compared to the use of nominal GDP. The inflation and deflation need to be considered while calculating the exact outcome of the economic performance of a country in a given year. This will depict the actual growth or decline in the performance of the economy and would help in formulating plans for future developments of the economy. It will also help the government in preparation of the fiscal policy. GDP Inadequate as a Measure of Social Welfare GDP is calculated only for the gross count of products and services that are purchased and sold with no difference between transactions that sums up to the well being and those that diminishes it. It assumes that every economic contract adds to well being but actually it is not so. GDP overlooks everything that occurs outside the sphere of monetized exchanges despite its significant contribution to well being. The crucial household performance and the sector of volunteer services are completely neglected. The significant contribution of the elder care, childcare and other home based tasks and volunteer works in the community are not taken into consideration in the GDP as those do not involve monetary transactions. When the non-market economy declines and the function shifts to monetized sector, GDP represents such activities as economic advancement. There is a rise in GDP temporarily, but the debt needs to be repaid as it becomes a burden for the economy. The GDP breaches the essential accounting principles by treating the exhaustion of natural capital as income, rather than as the decrease of an asset. This limits the social welfare activity. The GDP calculates the pollution as a double gain, once when it is created and when it is cleaned up. This process of GDP valuation does not contribute to the evaluation of social welfare (Vaury, 2003). Ways to make GDP a better measure of Social Welfare The GDP as measurement of social welfare requires comprising various aspects that contribute to the social welfare. The economic contributions of various social and environmental factors are to be integrated for the valuation of social welfare. The economic transaction that adds up to the well-being of the economy should be included and evaluated. The proper integration of factors should be measured so that the benefit of economic activity can be weighted against costs. The social breakdown is actually cost to the economy. GDP treats the social breakdown expenses as addition to well-being. But this should be deducted from the cost that arises from divorce and crime. The cost of water and air pollution should be evaluated by actual damages that occur to human health and the environment. This forms the social part of life and requires to be evaluated in appraising the economic system. The amount exhausted on capital objects as expenditures and the worth of the service they supply year after year as a gain requires to be evaluated for social welfare. This pertains mutually to private capital items and to public infrastructures. The aspects of nature benefiting the human social life should also be considered. The degradation of farmland, non-renewable minerals and wetlands as a cost should be evaluated which increases or decreases the social welfare of the people. The contribution of public services to GDP is always underestimated. The free service occurring from the past public investment does not occur in GDP, converse to its private equivalent. Computation of Real GDP Year Nominal GDP 1987 4,702 1988 5,063 1989 5,244 1990 5,514 1991 5,672 Real GDP when base year is taken as 1987. (Current year NGDP – Base year NGDP) / Base year NGDP *100 (Das, n.d.). Year Real GDP 1989 11.52 1990 17.26 1991 20.62 (Das, n.d.). The performance of the U.S. economy over the period 1989–1991 In the year 1989, the US economy had observed considerable growth. The development attributes were moderate wages, stable decline in unemployment to 5.2% of the labour force and consumer prices increases. In the year 1990, the growth had slowed down to 1% due to various factors. The main reasons were the increase in the oil prices, decline in business and consumer confidence and international increase in interest rates. There were certain problems like, insufficient investment in economic infrastructure, cut down of expenditure education, strict budgets, rising medical bills and trade deficits. Also, in the year of 1990, the US economy faced recession. Unemployment increased from 5.2% in 1989 to 7.5% in 1991. Iraqs attack on Kuwait in August 1990 slanted the extent of the consequential rise in oil prices and collectively with the fall in consumer confidence, strained the U.S. into a recession situation. The service sector like banks, financial firms and insurance companies were badly hit and showed affected GDP. From the fourth quarter of 1990 to the second quarter of 1991 the real GNP fell by 1.2%. There were other international forces that caused the economy to develop in a slow rate. References Das, N., No Date. GDP and the Standard of Living. University of Delaware Newark. [Online] Available at: http://www.udel.edu/Economics/ndas/gdp.pdf [Accessed October 12, 2010]. Experimental Economics Centre, 2006. GDP Deflator. Georgia State University. [Online] Available at: http://econport.gsu.edu/content/handbook/Inflation/GDPdeflator.html [Accessed October 12, 2010]. Vaury, O. (2003). Is GDP a good measure of economic progress? Real-World Economics Review. [Online] Available at: http://www.paecon.net/PAEReview/issue20/Vaury20.htm [Accessed October 12, 2010]. Bibliography Allen, R. E. Financial crises and recession in the global economy. Edward Elgar Publishing, 1999. Read More