Wednesday, December 7, 2011

“Pros and Cons of GDP as a measure of Economic Development versus Human Development Index.”


Before we discuss GDP and HDI, first we need to define them. First, Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living. On the other hand, Human Development Index (HDI) is a comparative measure of life expectancy, literacy, education and standards of living for countries worldwide. It is a standard means of measuring well-being, especially child welfare. It is used to distinguish whether the country is a developed, a developing or an under-developed country, and also to measure the impact of economic policies on quality of life. The former is concerned only on production while the latter is concerned on standards of living like literacy, levels of education, life expectancy, well-being and child welfare. GDP fails to tackle the concerns of HDI as a result some countries are experiencing economic growth like India, Indonesia, Philippines, Peru and others but the standard of living or quality of life is not rising or catching up. In those countries poverty is high, quality of education is low and many of their citizens are searching for a better-paying job overseas. Whereas this should not be what is happening and they should be almost at par with developed countries in the west and Japan. As a result, in paper their respective economies are growing but in reality, their people do not feel it. It is as if the economy did not grow at all.
GDP was formulated in the early 1930s during the depression by economist Simon Kuznets at the request of the US government because during that time there was no way to measure the economy which they desperately need in order to recover from the depression. It measures the size of an economy by adding up the value of goods and services produced within the country during a period of time. Using the expenditure approach, GDP is equal to Consumption + Gross Investment + Government Spending + Net Export (exports - imports). Most countries use GDP to measure standard of living. Economists, policymakers, international development agencies and even the media use it as an indicator of the economic health of a nation. The advantages offered by GDP are that it is widely and frequently used and its data requirements are readily available. Since the definition is common among countries, consistent comparisons can be made between and among them.
Let us have a look at GDP figures for 2011:

The figures show that the United States of America leads nations with a GDP of $14582 billion followed by the People’s Republic of China with $5879 billion and Japan with $5498 billion. The countries at the top of the list take the lead in terms of total economic activity taking place within their boundaries. However, it does not necessarily mean that their citizens are better off than the rest of the world in terms of overall well-being. Take for instance, the US - its GDP includes activities considered detrimental to humans and the environment. Of its total GDP in 2011, about $229 billion were for mining-related activities including oil extraction. Another example - China was the world's number one emitter of toxic carbon dioxide during that year - a result of its high level of manufacturing and industry-related activities. While this contributed to a high GDP for China, many of the Chinese people had to suffer living and working in a polluted environment.
The examples above show some of the limitations and disadvantages of GDP. Certain activities that have a negative impact on the people's well-being could end up being recorded as positive contributions to the GDP. Take for instance, crime. Rising criminal activities can increase the country's GDP through greater expenditures toward maintaining law and order (e.g., hiring of additional police members, purchase of guns, prisons, etc). Another example is the consequence of having depleted forests because of logging activities. GDP is increased when trees are cut down for lumber and other uses. The negative impact of deforestation is not taken into consideration. A further example is divorce or annulment. As divorce or annulment rates increase, so too does the related spending on litigation, lawyers' fees and the establishment of separate households. The emotional, psychological as well as spiritual impacts of divorce on the individuals concerned are not considered.

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