Question

Why GDP is a Poor Measure of Progress

WOULD a feudal king swap places with a present-day insurance clerk? The king has many palaces and armies of servants. But he is also a martyr to toothache. News reaches him slowly. His food is often stale. And he is bored of his courtiers. He might willingly trade his kingdom for life as an office drone in the 21st-century, with its dentistry, refrigeration, Google and YouTube. The poser underlines the great material advances made in recent centuries. It also shows how tricky it is to compare living standards over time and across societies. Comparisons over recent decades are routinely made using GDP, but they are troublesome. Why is GDP a poor measure of progress?

Gross domestic product is a measure of output, income and spending all at the same time. In post-war Europe and America, the growth in living standards and in GDP were synonymous. GDP growth became a target for politicians and a scorecard by which they were judged by voters. Even so, it has always had critics. Environmentalists have long lamented that GDP treats the plunder of the planet as something that adds to income, rather than being treated as an expense. A repeated charge is that GDP is divorced from notions of spiritual well-being. Robert Kennedy once famously took aim at GDP which, he said, counted cigarette advertising and jails but did not include “the beauty of our poetry or the strength of our marriages”. Still, GDP growth was a decent, if rough, guide to material progress. The more output and income was generated (after adjusting for inflation), the better off we were.

That equation worked pretty well when the economy was still mostly farms and factories, producing things of similar quality that could easily be counted. But GDP is less suited to the task of measuring modern, service-led economies that are geared towards the quality of consumer experience, rather than consumption of greater quantities. It is far harder to identify the extent to which changes in price reflect a better service. When medical charges rise, it will generally count as inflation, even if the quality of health care is improving faster than prices are rising. And where consumers pay nothing, as is often now the case with digital services, they do not register in GDP. The consumer benefits from Google and Facebook are thus excluded. Previously paid-for things, such as maps, encyclopedias and music recordings, are now free. So they have dropped out of GDP. Online shopping, banking and travel-arranging is more convenient for consumers. To the extent that all this saves on buildings, it detracts from GDP. For the most part, the trickiness of measuring the output of services leads real GDP to be understated. But mis-measurement works the other way, too. For instance, if an airline squeezes more (and thus cheaper) seats on to a plane, it counts as extra output, even though the quality of service falls. Perversely, the more risks banks take, the more they contribute to GDP, even as the quality of lending falls.

GDP is a creature of the industrial era of mass-produced, homogenous goods. It is a far less useful guide to affluent economies where the quality of services is prized over simply having more stuff. It is badly attuned to digital economies, where activities that were once paid for, such as contacting friends or finding information, no longer attract a charge. GDP is thus increasingly failing to fully capture gains in average living standards. It is tricky to compare the life of a medieval king to that of a modern-day worker. But it is almost as difficult to put a number on how much better is a consumer basket that includes smartphones and music streaming to one filled with fax machines and audio-cassettes.

Discuss why GDP may or may not be a good measure of progress in modern economics using examples from the the above article to support your answer ( word count:250-350 words)

{ Hint : a complete discussion will present both sides of the argument }

Answer 1

gross domestic product is merely a calculation of all the goods and services produced within the teritory of a country within a given period of time. its a quantitive measure and it doesnot count qualitative values of things while in modern days its a quality driven era and not quantity. people are more focused on quality rather than quantity and converting peoples satisfaction from a given product or services into quantity terms is a difficult task. its not just difficult its more time consuming to take care of each and every persons level of satisfaction from a certain good or service as it varies from person to person. but while its really dificult to take counts on the quality of something or the satisfaction derived from it, its really important at the same time to measure these qualitative terms in the modern era of economics. many economist have suggested that GDP is not a good measure of the economic well being there are also no better substitute given by them. GDP doesnot take into account the qualitative aspect of a service of the doctor but it does take into account the rate of inflation and its impact on health care services. so even if the quality of medical services detoriorate if the cost increases it shows a possitive sign on GDP but the customer dissatisfaction is not taken into consideration here. peoples happynes there dissatisfaction everything matters a lot now a days and it should be counted as well to reflect the real wellbeing of people. many economist have suggested to use genuine progress index in place of GDP to measure well being but difficulty is to convert the qualitative aspect into quantity terms.