Question

Discuss some strengths and weaknesses of using GDP to measure well-being.  Are there any alternative measures?  How do they improve upon GDP to measure well-being?

Answer 1

GDP is an indicator of a society’s standard of living, however gives a rough indicator as it does not directly account for leisure, environmental quality, levels of education and health, activities conducted outside the market, increases in variety, increases in technology, changes in inequality of income, or the negative or positive value that society may place on some types of output.

ADVANTAGES:

--GDP gives a better measure or analysis of activities in an economy through its growth rate and changes in comparison to any other existing measure. It summarizes a whole range of economic information and the helps to make a comparison of strengths and weaknesses of various sectors.

-- GDP assists the analysts and policy-makers to easily adjust, guide, and implement policy in economy.

-- GDP acts as an accurate barometer of the climate in business by giving useful information to the business and government to adjust in various kinds of contingency issues such as depression and recession.

-- GDP acts as a simple proxy for economic and social welfare

-- GDP is widely used in various parts of the world that provides economist studies for making a comparison among different countries.

DISADVANTAGES: The main issues of the GDP as the indicator of society’s economy and society’s well-being focusing on economy as well as environment are as follows:

--GDP does not account for leisure time.

--GDP includes what is spent on environmental protection however it does not include actual levels of environmental cleanliness. GDP is inclusive of the cost of buying pollution-control equipment, however it does not address whether the water and air are actually dirtier or cleaner.

--GDP consists of what is spent on healthcare, and education, however does not include health, and learning. GDP counts spending on medical care, however does not address whether infant mortality or life expectancy have fallen or risen. Similarly, GDP includes the spending on education, however fails to address directly how much of the population can write, read, or do basic mathematics

--GDP counts production that is exchanged in the market, however does not includes production that is not exchanged in the market. For instance, hiring someone to mow the lawn or clean the house is part of GDP, however doing these tasks yourself is not included in the GDP.

--GDP does not count non-market production activities and all of the production in terms of legal and illegal which falls in the underground economy

Thus considering the above problems we can say that GDP per capita does not fully capture the wide idea of standard of living has led to a concern that the rise in GDP over time are illusory.

The alternatives to GDP measurement are Human Development Index of the United Nations Development Programme (also known as UNDP). It is inclusive of indicators of development such as access to education and life expectancy, as well as GDP. Other alternatives can be Gini Coefficient, financial transparency, proportion of military expenditure, the ratio of bank assets to GDP, economic development and sustainability, external debt dependency, etc.

In my opinion these environmental degradation and resource depletion must be included in the measure of GDP because it affects the way we evaluate the net income and well-being.