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In: Economics

Read the article below. In your opinion is GDP an outdated tool for policymakers? Should GDP...

Read the article below. In your opinion is GDP an outdated tool for policymakers? Should GDP be replaced with an alternative measure? What are the pros and cons of the proposed new measures?


Recently, GDP has come under scrutiny as a planning tool, with some decision-makers turning instead to the Happiness Index, a marker that focuses on the wellbeing of the citizens rather than an economic bottom line. This Index would help governments use their budgets with the aim to increase the welfare of its citizens instead of the nation’s Gross Domestic Product.

Gross Domestic Product (GDP) has always been a dependable tool for economic discussions, an index that is used to determine the health of an economy and the wellbeing of a nation. GDP is a measurement of the value of finished goods and services within a country over a specific time frame. A nation’s Gross Domestic Product can then be divided by its population to determine the GDP per capita. This is, in turn, used to make assumptions on standards of living within that country, with the idea that the higher the per capita amount, the better the standards are.

However, GDP has had mixed results when trying to illustrate the welfare of the people. As an economic tool, it only makes assumptions about the basic standards of living, which can be different across the socioeconomic spectrum of a nation. Additionally, better standards of living do not necessarily equate to better welfare, with the latter affected by a range of factors including but not limited to mental wellbeing, cultural resilience, and environmental health.

Nobel Prize-winning economist and designer of the modern GDP Simon Kuznets noted himself in 1934: “The welfare of a nation can scarcely be inferred from a measurement of national income.” GDP, which had been used in one form or another since 1654, was reworked to its current state in 1934 when Kuznets presented a report to the US Congress regarding national wealth. However, as he expressed at the time, it should not be used as more than an economic tool to set an economic value of a country’s production power, and that equating GDP to citizen welfare would be over-simplifying a very complex situation.

The Kingdom of Bhutan became the first nation to test a Gross National Happiness Index in 2008. Bhutan started to measure factors including psychological health, living standards, community vitality as well as environmental and cultural resilience - which the government would then use these metrics to inform its policies. Creative accurate measurements for these factors that are easy to measure is often challenging, an excuse often given for avoiding them altogether.

The New Zealand Project

New Zealand Prime Minister Jacinda Ardern is the latest leader to adopt the Happiness Index metric, announcing a new budget that focused on improving the prosperity of local communities. Ardern hoped that it would: “(lay) the foundation for not just one well-being budget, but a different approach for government decision-making altogether.” As part of the budget, there will be an increase of NZ$200 million (US$131 million) in services aimed at helping victims of domestic and sexual violence as well as housing programs for the nation’s homeless population. Described as a “game-changing event” by London School of Economics Dr. Richard Layard, New Zealand’s budget has set a new standard for progressive policy “no other major country that has so explicitly adopted well-being as its objective.”

ASSOCIATED PRESS

After unveiling New Zealand’s new economic framework, the center-left government also explained the basis behind their shift in focus. All new spending must advance one of five government priorities: improving mental health, reducing child poverty, addressing the inequalities faced by indigenous Maori and Pacific island people, thriving in a digital age, and transitioning to a low-emission, sustainable economy. New Zealand’s change in policy represents a shift that economists have long theorized could be a more effective use of government spending .

The 4.9-million strong nation has a long history of progressive policy-making and defending its interests against international superpowers, and as Max Harris lays out in his book The New Zealand Project, it makes it the ideal nation to lead a change in global views. In his 2017 publication, Harris explains how the island nation would be better served working towards integrating traditional community values focusing on collective welfare in order to tackle large issues such as climate change or social inequality. Harris’ vision for a better, happier and more cohesive New Zealand is now a step closer to being fulfilled, with Jacinda Ardern’s new wellness budget.

Communities Over Economics

As Finance Minister Grant Robertson points out, the economic growth of a nation should not come at the cost of its citizens: “Sure, we had – and have – GDP growth rates that many other countries around the world envied, but for many New Zealanders, this GDP growth had not translated into higher living standards or better opportunities. How could we be a rockstar, they asked, with homelessness, child poverty and inequality on the rise?”

ASSOCIATED PRESS

Robertson’s statement summarizes the views of many governments worldwide, who are increasingly looking to create happier communities “For me, wellbeing means people living lives of purpose, balance, and meaning to them, and having the capabilities to do so.” From the United Kingdom to Bhutan, the Happiness Index has been adopted in various forms in order to improve the welfare of the general population, while also re-prioritizing the use of a nation’s economic powers. New Zealand’s decision to embrace it as a defining part of their national budget has started debates internationally to determine whether this new approach may be the most effective for both communities and their respective economies.

GDP may be an outdated metric when it comes to determining the welfare of a nation’s populace and although it presents an accurate indication of a country’s economic health, its role as a key budgetary tool. As nations increasingly move towards transitions toward sustainable development and efficient energy policies and technologies, the use of the Happiness Index could help spur investment in projects that improve the community, the economy, and the environment. New Zealand has always been at the forefront of change throughout the ages, and it is poised to continue its ways by pioneering a community-centered economic plan.

Solutions

Expert Solution

Solution:

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services within the geogrphical boundaries of a country during a certain period. It is also a measure of the income earned from production, or the total amount spent on final goods and services (less imports).

GDP, whose basic concept was coined at the end of the 18th century, has been the most commonly used measure of economic activity. The modern concept was later developed by the American economist Simon Kuznets in 1934 and has been since adopted by almost all the economies in the world to measure their respective growths.

GDP as a measure of a nation's economic growth makes sense because it's essentially a measure of how much buying power a nation has over a given time period. GDP is also used as an indicator of a nation's overall standard of living because, generally, a nation's standard of living increases as GDP increases. However, being a concept of the 18th and 20th century, at present in the 21st century, with all the advancements and modern problems, GDP is an outdated tool for the policy makers. The following points are just a few reasons why GDP is now an outdated tool:

  1. GDP does not take into account unpaid volunteer work: GDP does not consider the work that people do for free, like an afternoon spent picking up litter on the work done by our mothers at home. In fact, volunteer work has the potential to lower the GDP when volunteers do work that might otherwise have gone to a paid employee.
  2. Disasters can raise GDP: Wars require soldiers, oil spills require cleanup, and natural disasters require health workers, builders, and a lot of of helping hands. Rebuilding after a disaster or war can greatly increase economic activity and boost GDP, even though nothing productive, other than repairing and rebuilding, is done. It counts tragedies as economic bonuses.
  3. GDP does not take into account the quality of goods: Consumers may buy cheap, low-quality, non-durable goods repeatedly instead of buying more expensive, durable goods. Over time, consumers would be spending more money on replacing and repairing the cheap goods than they would have if they had bought durable goods in the first place, and GDP would grow as a result of waste and inefficiency, without any real productive spending.
  4. GDP ignores many crucial ways to measure the wealth of a country: GDP neither considers the health of people nor the amount of clean air available for the people to breathe nor life span, gender equality, opportunity, education, etc. This is because GDP was not developed to rank the welfare of the countries but to just measure money as the world recovered from the Great Depression of 1930.

While even today, GDP is the single most important indicator of the growth of economic activity, it falls short of providing a suitable measure of people's material well-being for which alternative indicators may be more appropriate. The appropriate alternatives for replacing GDP can be Thriving Places Index (TPI) ,  Happy Planet Index , Human Development Index (HDI),  Green GDP, Gross National Happiness Index and many more.

Out of these alternatives, Gross National Happiness (GNH) which was coined in Bhutan and has already been adopted by New Zealand and can be usd as a new measure for the economic growth of the countries across the globe.

Being a follower of Buddhism and mindfulness principles, the king of Bhutan decided that a more spiritual and holistic approach to economic growth would reflect his country’s needs. The fourth King of Bhutan coined the idea of Gross National Happiness in 1974 as instead of only looking at the money put towards products and services, he wanted to take into account the follwoing variables:

  • living standards
  • health
  • good governance
  • ecological diversity
  • resilience
  • time use
  • psychological wellbeing
  • cultural diversity and resilience
  • community vitality

To measure these factors, government officials interview a random selection of 8,000 households, who are compensated a day’s wage for answering an in-depth questionnaire containing 148 questions (with lengthy sub-questions), the survey examines how residents are doing on every level – from the number of televisions in a home to whether wild animals have impacted their lives.

The pros of Gross National Happiness as an alternative for GDP are as follows:

  1. Setting an alternative framework for development: The 9 variables of GNH protray the well being of the citizens better than even per capita GDP.
  2. Allocating resources as per the need: The index provides with the details of as to how the GNH is distributed across the population by providing the details of different categories in the level of happiness experienced by the citizens.
  3. Measuring progress overtime: The indicators og GNH require to be sensitive to the changes occuring overtime, like the changes in policy. Through this the composition of well-being can be observed over decades.
  4. Sustainable development: During times when countries are following market friendly policies, GNH and Bhutan have been following environmental, ecological based policies.
  5. Considers the opinion of the masses: Through the surveys, GNH takes into consideration the opinion of the citizens and gives them a sense of belonging unlike GDP, where there is no personal touch.
  6. GNH is a process indicator along with being an outcome indicator: GNH helps the adminitration and policy makers in identifying the link between processes and outcomes. thereby helps in modifying, examining and implementing policies.

The cons associated with GNH are:

  1. Definition of happiness: Happiness is a subject term, hence arriving at an common definition of happiness which applies to all citizens is a difficult task.
  2. Measurement problems: With respect to all the nine variables involved in the measurement of GNH, it is quite possible that some citizens may under/over report them which will not lead to a correct value for GNH.
  3. Conducting the survey: Bhutan, who introduced GNH, is a small Himalyan country with a population of 700,000, so carying out a survey there regarding the happiness is not very cumbersome but the same cannot be said for the heavily populated and geographically diverse countries like India and China.
  4. Loopholes in the questionnaire: The questionnaire for the survey has around 249 questions including the lengthy subparts with 750 variables requiring information about all. It takes around 5-6 hours for each respondent to complete the survey, which is not a very reasonable thing. This is because people tend to lose interest after a certain point of time and will give irrelevant, incomplete answers to get it done quickly.
  5. International comparisions: When different countries have different indicators for happiness and economic growth, then it becomes a difficult task to make comparisions.
  6. Limits in the indicators: The nine indicators themselves have certain limitations like spirituality is as and indicator is overlooked in the measurement of GNH. Education is taken into account for GNH but the development of soft skills is not considered while soft skills is an important aspect for a person's development.

Thus, even after having some disadvantages, GNH can be considered as a potential alternative for GDP.


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