Alternative Measures of GDP - Research Paper Example

? Alternative Measures of GDP Introduction Gross Domestic Product (GDP) is widely being used as a means to gauge the economic development of a particular country. It has been a broadly prevalent measure which has been in use for nearly a century. The alterations in a country’s GDP are considered to depict or indicate the growth of a country at large. According to the definition provided by OECD (2009), GDP can be defined as “the standard measure of the value of the production activity (goods and services) of resident producer units”. Thus, GDP concentrates in a few basic aspects of the economic structure, such as the production function of the economy, consumption pattern, and population among others. However, there are few restrictions identified in this system of economic growth measurement which calls for the requirement of alternate methods to present more accurate detail of the economic health of a geographic and political division (Mankiw, 2011). These alternative computations of GDP would be considered in this paper in order to evaluate their impression over the interpretation of GDP. Alternative Measures to GDP Studies have revealed that there are a few inadequacies in the concept of GDP and for the reason of which the need for corrections in the factors included in the GDP along with some substitute computations were identified by various economists. It was stated by Giovannini & Hall (2010) that a collection of indicators needs to be developed which could offer an increased surrounding explanation of the living standards as well as the well-being compared to just a single indicator which is the GDP. For the period of 1970s, a collection of communal gauging methods were used with the intention to measure the socio-economic growth by the Organization for Economic Co-operation and Development (OECD). These techniques were considered to be the alternatives of GDP among which few were developed on the foundations of the concept itself (Giovannini & Hall, 2010). Some of the substitute measures also tend to consider the concept of GDP as well as the nationwide accounts to be their groundwork. These have been adapted to appear more accurate than the GDP measure with a few modifications in the traditional method of measuring economic growth. The modifications involve certain additions and deductions of a few indicators concerning the environmental problems, and sustainability problems among others so as to reach to a broader computation of well-being (Commission on the measurement of Economic Performance and Social Progress, 2010; Boarini & Et. Al., 2006). Another alternative is said to be the well-being indicators which does not entail GDP in their computations and thus, act as a substitute to the concept. The main substitute amongst the approaches have been learned to be the ‘economics of happiness’ that intends to measure the welfare of the residents in the economy. This method merges practices made by economists as well as psychologists with the intention to determine the degree of happiness in a particular society along with the policy that contributes to it. This particular method goes more from the economists’ perception of happiness which centered on ‘revealed performance’ along with the beliefs that increased unpaid options that were available to an individual and make that individual happier (Nallari & Et. Al., 2011; Schepelmann & Et. Al., 2010). The results from the happiness assessment point out that the unpaid options did matter, similarly as did an individual’s comparative earnings in the society along with the percentile position of those earnings. To be precise, it was found that after an amount of certain per capita earnings gained per annum, the total earnings did not contribute to happiness. Therefore, this method established that total earnings were crucial in describing the individual’s well-being which in turn was essential in gauging the GDP. Another substitute method for GDP so as to measure the economic growth of a country has often been categorized to be the composite measures. This method entails the evaluation of the composite computation of growth. It further takes into concern the compilation of numerous indicators with the purpose to calculate the morbidity. It is worth mentioning that the computations related to these involve a sequence of indices and thus can be termed as quite complex as a process of measuring economic growth (Nallari & Et. Al., 2011). The other substitute measures of the GDP that were developed so as to take into concern the social facets are Fordham Index of Social Health (FISH) which calculates 16 socio-economic factors; Genuine Progress Indicator (GPI) which was developed in 1994; United Nations Human Development Index (UNHDI); Gross Sustainable Development Product (GSDP); and Gross Environmental Sustainable Development Index (GESDI). Although the notion of GDP tends to be unambiguous and easy but the actual interpretation and the calculation of the factors have been the focus of several inadequacies that also include its inefficiency to identify poverty, family break-down, income gap, morbidity, crime and other similar factors that have significant impact on the economic growth in the long-term scenario (McGregor Consulting Group, 2011). Owing to these limitations, the substitute measurements were developed having those factors included that lacked in the GDP gauging method. Comparison of the Effectiveness of GDP and Its Alternative Measures GDP has been used as a measure to ascertain the economic growth of a country since long. However, there are certain constraints which have been identified in the process owing to which the actual economic growth has been observed to be interpreted inadequately or ineffectively to a certain extent. GDP has been studied to take into concern the overall economic behaviors which engage financial transactions. Due to this particular characteristic, it has been learned to experience two chief faults (Costanza & Et. Al., 2009). Firstly, as it is a financial summation, it hardly takes into consideration the distributional problems and even the constituents of human behavior or well-being as there is unavailability of any direct as well as indirect means of ascertaining their market value. Secondly, the GDP estimates the productive flows as a consequence of which the influence of the productive operations on the reserves even tends to entail the natural resource reserves. This gave rise to the need of alternative measures of gauging the economic growth other than the GDP. This need was recognized as the plans that were developed taking into concern the GDP, had been found as deficient in addressing a few of the other significant issues (Summers & Heston, 1995) Being a means of computation of the behaviors related to the production function of an economy, the concept of production can be observed to be quite broad and complex in its nature set by the System of National Accounts (SNA 93). It entails the complete production of particular as well as combined goods and/or services which are delivered to the units apart from their respective producers. It also involves the production of those goods and/or services that are acquired by the producers for their personal purpose or for the arrangement of gross capital in terms of drawings. This also includes the generation of services related to housing by the possessors and/or the occupiers for their own purpose as well as the generation of domestic and personal services with the help of engaging paid domestic workers. Furthermore, the GDP did not include the several household behaviors which were observed to be of industrious nature from an economic point of view. These issues evidently related to the calculation of non-market yield and the collective market production. The other inadequacy is the cumulative concept of GDP which merely involves the computation of the flows talking place internally or across-borders (Commission on the measurement of Economic Performance and Social Progress, 2010). The explanation of production that is being considered by SNA entails the market related behaviors along with the goods and/or services offered without any exchange of financial consideration or at reduced prices on behalf of the government and also without any fraction of the production that is done for personal or household purposes. There have been reasons explained for the non-inclusion of numerous domestic as well as individual services from ascertaining the GDP in-spite of those factors having an effect on the economic interests (Commission on the measurement of Economic Performance and Social Progress, 2010). It was stated that the generation of services for the household purpose is considered to be an independent behavior that had restricted influence over an economy. A noteworthy portion of the creation of household personal as well as the domestic services does not serve the market due to which an appropriate market value could not be associated to such services. It becomes complicated to determine the valuation of those outputs related to the services and even the related earnings or expenses which is competent of being included to the worth of real financial transactions. It was also stated that the attributing worth for the household creation or generation of services would give way valuations which would be unequal to the financial worth. In reality, if those incomes which were related to the household production would be actually accessible in cash, it would have obviously assisted to alter the household consumption (Commission on the measurement of Economic Performance and Social Progress, 2010). The GDP also does not entail or consider the subject of distribution among the individuals. This distribution among the individuals of the possessions has been learned to be a critical formative factor for welfare. However, in-spite of its importance, only the combined economic statistics for households is being included in the National Accounts. These summations do not give a clear representation of the accurate figures in relation to the household sector. The GDP is also known to merely calculate the flows and not the wealth reserve in a particular economy. The consumption capacity is not only related to the income flow but is also reliant on the available wealth stock. It also needs to be mentioned that the income flow should not be considered to be the sole factor having an effect on the development of wealth stock. Revaluations, fixed capital utilizations and further volume alterations have been also known to manipulate the wealth stock which is not considered by the GDP measuring process but provides with a significant depiction to the growth prospects of the economy (Commission on the measurement of Economic Performance and Social Progress, 2010). It also does not include the aspect of welfare of the nation, i.e. the ‘economics of happiness’, which is perceived to contribute significantly towards the overall economic growth of a nation. The other alternative measures have been stated to provide increased support towards ascertaining the economic growth of a particular region. The alternative indicators were developed with an endeavor to offer a broader understanding of the living conditions as well as the social progress. The substitute computations have been observed to take some additional variables as well as those factors into concern that are not included in the GDP but tend to have a noteworthy impression over the growth prospects of an economy (Commission on the measurement of Economic Performance and Social Progress, 2010). Impact of the Alternative Measures in Interpreting GDP The substitute computation assists in interpreting the GDP and is referred to be a more accurate way by taking into concern several factors that were previously ignored in the calculation of GDP. The other measures are known to involve the different socio economic factors which were thought to have an impact on the economic growth of a nation. The constant economic development happens to be the most crucial determinant in ‘assuaging poverty’. However, the poverty declination rate varies in different countries and is reliant on the preliminary stage of income disparity, the development of disparity over time, and also on the perceived understanding regarding the area of concentration of that development. The GDP calculations consider government productivity to be associated with the government expenses. However, it was found from the substitute computations that the government production merely stands for 20 percent of the development and the total government expenses for above 40 percent on an average. This proves that the traditional way of ascertaining the economic growth by GDP was not accurate and would thus fail in depicting the clear picture of economic growth. The substitute computations have been observed to offer an increased number of gauging techniques that broadens further than the GDP. For instance, the casual economy has been stated to provide an explanation for around 30 to 50 percent of the growing country’s economy. This aspect was also not incorporated in the traditional way of calculating and interpreting GDP (Nallari & Et. Al., 2011; Greenwood & Et. Al., 2010; Tucker, 2008). The alternative measures also take into concern the associations with other countries in the world by way of altering the production as well as import taxes. It also tends to manipulate employees’ compensation and property earnings from/to other countries engaging payments as well as taxes on the income, property owned and social contributions. The other measures are even known to consider depreciation and thus, it can be stated that their computations provide with the attuned figures in regard to capital consumption. The notion of well-being has also been observed to be significantly considered in the alternative computations to be among the chief factors in ascertaining the economic growth (Commission on the measurement of Economic Performance and Social Progress, 2010). Various other measures have been adapted to consider social factors such as infant mortality, child abuse cases, poverty issues, teen suicide cases, educational issues, employment hazards, health related issues, crimes, distribution of food stamp, income distribution and disparity problems, household expenses, and unpaid work among others. These substitute measures of GDP also take into account the environment and industrial growth related problems faced by an economy including exhaustion of resources, alterations or losses in spare time, duration of consumer products along with public infrastructures, reliance on international assets, services, as well as gender equity. Effect of the human behavior on the environment along with the economic growth can also be observed as major concerns for these alternative measures to GDP. These mentioned factors have been entailed in the alternative computations which facilitates in providing a clear scenario of the economic growth (McGregor Consulting Group, 2011). Conclusion From the above discussion, the need and the significance of the alternative measures to GDP is evident. The GDP, since many years, was considered to be the appropriate representation and determination of the economic growth of a country. However, gradually quite some inadequacies were identified in the calculation process of GDP which prevented from ascertaining the actual growth of the country along with the individual areas which contributed greatly towards the growth. Among the ignored factors, the aspect of well-being was considered to be the most noteworthy one which influenced the economic growth of a particular country heavily. Several alternative measures were developed among which a few were designed on the groundwork of the GDP with some needed amendments. Meanwhile, a few were freshly developed and the other few were designed by making some necessary alterations in the concept of GDP. However, these measures were observed to give a clear and accurate representation of a nation’s economic growth in relation to a particular segment of the economy. Therefore, it can be stated that considering GDP as the sole interpreting technique of economic growth can result in noteworthy deficiencies as might be in case of any other alternatives. Economic growth is a broad concept and comprises of various multidimensional factors which certainly requires more than one interpretive measure in which GDP can be a particular. References Boarini, R. & Et. Al., (2006). Alternative Measures of Well-Being. OECD. Commission on the measurement of Economic Performance and Social Progress, (2010). Survey of Existing Approaches to Measuring Socio-Economic Progress. Documents. Constanza, R. & Et. Al., (2009). Beyond GDP: The Need for New Measures of Progress. Boston University. Giovannini, E. & Hall, J., (2010). Measuring Well-Being And Societal Progress. OECD Directorate for Employment, Labour and Social Affair. Greenwood, D. T., (2010). Local Economic Development in the 21st Century: Quality of Life and Sustainability. M.E. Sharpe. Hobijin, B. & Sreindel, C., (2009). Do Alternative Measures of GDP Affect Its Interpretation. Federal Reserve Bank of New York. Mankiw, N. G. (2011). Principles of Macroeconomics. Cengage Learning. McGregor Consulting Group, (2011). Alternatives to the GDP. Economic Indicators Measure Economic Well-Being And Wealth. Nallari, R. & Et. Al., (2011). Frontiers in Development Policy: A Primer on Emerging Issues. World Bank Publications. OECD, (2009). OECD Regions at a Glance 2009. OECD Publishing. Schepelmann, P. & Et. Al., (2010). Towards Sustainable Development. Alternatives to GDP for measuring progress. Summers, R. & Heston, A., (1995). Standard of Living: An Alternative Measure of Nations’ Current Material Well-Being. Center for International Comparisons at the University of Pennsylvania. Tucker, I. B., (2008). Economics for Today. Cengage Learning. Read More