Economic growth around the world has meant countries has been able to develop at an exponential rate, particularly those economies in third world countries. Gross domestic product or GDP gives an indication of the country’s economic situation. Many economists would use gross domestic product to provide figures to help determine the rate of growth and the size of an economy for various countries. GDP can be calculated by taking the total value of products and services that are manufactured by a country (with their border limits) over a specified period of time. This provides an overview of that country’s economic health (Fernando, 2021).
Gross domestic product includes anything services or products that are used in specific established markets. The products or services must be produced in that quarter or year to be included, if they are produced outside of this time period, they are not included in the GDP for that particular period. Gross domestic product also excludes goods or services that are produced outside of the host country.
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GDP provides an overview of a country’s economic situation. There are 3 ways that an economist may look to calculate GDP. As mentioned previously production is one of the values that are used for GDP and there is also income and expenditure of the general public (Prachi, 2020). This then may be adapted to account for the different size of population that a particular country has or the level of inflation that is currently being experienced.
“The level of GDP is now 8.8% below where it was pre-pandemic at Quarter 4 (October to December) 2019, revised from a first estimate of 8.7% below” (McAuley, 2021). This gives us an indication of the severity of the Covid-19 pandemic and the effects it has had on not only the local economy, but the global fiscal world. With economy grinding to a halt for several months at the start of the pandemic, this led to huge decreases in the amount of money being spent in the previously mentioned sectors. Therefore, this has led to the 8.8% drop in the level of GDP. However, with all restrictions soon to lifted for the summer of 2022. Countries should begin to see the normal proceedings for their gross domestic product. The uncertainties now lie with rising rates of inflation and hikes in living costs. As previously mentioned, the GDP will need to be adapted to take these rises into account.
What Are the Issues with Using GDP as a Measure of Well-Being or the Standard of Living?
Gross domestic product per capita is typically used as a measure of well-being. However, this does not mean that there aren’t flaws with it being used as a way to measure the standard of living in a country.
Gross domestic product per capita has several issues when used as a measure of well-being. Unpaid working activities are not included. Therefore, things such as volunteer work are not accounted for within the final numbers. While this may look acceptable on the outside, as no money is changing hands for these types of activities, it is what these actions contribute towards. There are a significant number of activities which would contribute towards gross domestic product that couldn’t function without the support of these volunteers. This means that it is misleading not to have some sort of explanation even identifying how many of these volunteer hours have been worked.
Many of the fastest growing economies are those is third world countries such as India and Bangladesh. These countries are often experiencing their own miniature industrial revolution and are now making strides towards being major players with regards to their economy. However, for any country to produce more, they must have the infrastructure to meet the demand. All of this will contribute towards pollution and issues regarding health and safety. Although we are seeing governments begin to understand the long-lasting effects of chemical pollution, many countries who are still developing will use these methods to bring their operations in line with the more established countries. Within GDP, this will typically be seen as a good thing due to the infrastructure and the jobs that are being produced. The issues regarding the pollution that has been created as a result of this growth may never truly be understood until many years into the future. GDP is unable to take into account the devastation that this will cause to the Earth and all of its inhabitants (Amadeo, 2020).
Lastly, there is an assumption within gross domestic product per capita that the production of resources and the income created as a result are shared amongst the population of the country evenly. GDP simply takes this figure as an average and it does not take in account the inequality of the inhabitants’ incomes. Therefore, GDP may show that a country has an excellent standard of living. However, this may be skewed entirely due to many rich individuals hoarding the majority of the wealth at the top and the common man is left fending below the bread line.
What Are the Current Debates Relating to GDP?
Gross domestic product has been used a way to measure the well-being of a country’s economy for over 80 years (Dvorkin, 2017). In the modern world, many economists have begun to question how relevant GDP is with regards to measuring the standard of living. As mentioned previously, GDP cannot take into account the volunteer work that is completed and offer this work contributes to the products or services which then factor into the final total for GDP. Although, this is valid and needs to be taken into consideration, gross domestic product is very relevant to several direct measures of well-being. Often quality of life can be determined accurately by looking at a countries life expectancy and also the mortality rate amongst infants. Therefore, it may be beneficial to have an accompanying method of determining well-being alongside GDP to help increase its accuracy.
Environmental degradation is a significant externality that the measure of GDP has failed to reflect. The production of more goods adds to an economy’s GDP irrespective of the environmental damage suffered because of it. So, according to GDP, a country like India is considered to be on the growth path, even though Delhi’s winters are increasingly filled with smog and Bengaluru’s lakes are more prone to fires. Modern economies need a better measure of welfare that takes these externalities into account to obtain a truer reflection of development. Broadening the scope of assessment to include externalities would help in creating a policy focus on addressing them.
GDP also fails to capture the distribution of income across society – something that is becoming more pertinent in today’s world with rising inequality levels in the developed and developing world alike. It cannot differentiate between an unequal and an egalitarian society if they have similar economic sizes. As rising inequality is resulting in a rise in societal discontentment and increased polarization, policymakers will need to account for these issues when assessing development (Kapoor and Debroy, 2019).
Is Focusing on Economic Growth a Good Thing?
Economic growth has raised living standards around the world. However, modern economies have lost sight of the fact that the standard metric of economic growth, gross domestic product (GDP), merely measures the size of a nation’s economy and does not reflect a nation’s welfare. Yet policymakers and economists often treat GDP, or GDP per capita in some cases, as an all-encompassing unit to signify a nation’s development, combining its economic prosperity and societal well-being. As a result, policies that result in economic growth are seen to be beneficial for society.
We know now that the story is not so simple – that focusing exclusively on GDP and economic gain to measure development ignores the negative effects of economic growth on society, such as climate change and income inequality (Kapoor and Debroy, 2019).
Higher economic growth will have various negative impacts on society, which may not be realized. The increased capacity of the industrial industry will in turn lead to increased pollution of the air. This can then lead to a reduction in the standard of living in that particular area. For example, Asia has been a leader in technological developments in recent times, in turn the amount of energy needed to power these operations has meant the quality of air in China has dropped dramatically in recent times. As the quote below states, the fossil fuels that are used to power this growth may mean that future generations have to bear the brunt of the negative impacts.
“Smog in China has many causes, including pollution from industries and traffic, but it tends to happen more often in the winter, when plummeting temperatures cause electricity demand to soar. This pollution can come from many sources, but burning coal has been linked to the largest number of air pollution deaths in China, causing 366,000 premature deaths in 2013” (Griggs, 2017).
In modern times however, a responsible government understand that they must act in a responsible manner when it comes to the environment. They have a social obligation to help protect the planet for future generations. The larger a countries economy grows, the more they need to be seen to be actively trying to reduce carbon emission and pollution. They may do this by introducing tariffs against things such as fossil fuels. They may reward businesses which user cleaner forms of energy, such as electricity, by having grants and subsidies to help pay for wind turbines or other energy producers. Countries who are developing may not see this as a viable option, however, they will be experiencing an unprecedented period of growth due to investments in their country from large businesses. These countries may not have the capacity to take on this growth and also make sure that it does not harm the environment. They will want to improve the economy of their country and the impact on the environment is collateral damage.
The growth of the economy may also lead to income inequality. The more affluent members of society will own more significantly assets than the average working man. Thomas Piketty observed that, without sufficient policies of redistribution, the wealthy tend to increase their wealth at a faster rate than economic growth because they can reinvest their dividends. Governments may find that they are able to help benefit those that find themselves in poverty. Higher growth tends to enable governments to be able to afford welfare states and offer a minimum level of production. Economic growth from 1900 to 1970 helped reduce levels of inequality in the US and Europe (Pettiger, 2018).
Organizations such as the United Nations, national governments, universities, NGO platforms and financial entities all use different indicators to measure welfare. These tend to link economic growth to social progress without identifying any moral objectives of the economy.
At the social level, there are many indicators for measuring well-being. Factors such as life expectancy at birth, level of education, empowerment of vulnerable groups, quality of employment, and quantity of free time, all give a more complete picture of personal development in society.
Meanwhile, aspects such as violence against women, sexual harassment legislation, physical safety, criminality indexes, good governance, and the signing of international arms treaties, all provide for assessing the suitability of the environment in which we co-exist (Pais, 2018).
Conclusion
Overall, gross domestic product is shown to be an excellent indicator of economic growth, but it fails to take into account various indicators of social well-being. To get a better reflection of the overall success of a country, analysts should use a mix of indictors to make sure that they get an unbiased result, which takes into account living standards, environment, and mental well-being among others. Although, gross domestic product can give us a clear indication of a country’s economic growth, it doesn’t always tell the full story. Therefore, in order to get a fair reflection of a country’s standard of living, you must use a wide range of indicators to get a unbiased answer.
References
- Fernando, J. (2021). ‘Gross Domestic Product (GDP)’.
- McAuley, N. (2021). ‘GDP Quarterly National Accounts: January to March 2021'.
- Amadeo, K. (2020). ‘Standard of Living’.
- Dvorkin, M. (2017). ‘Is GDP a Good Measure of Well-Being?’.
- Kapoor, A and Debroy, B. (2019) ‘GDP Is Not a Measure of Human Well-Being’.
- Pettinger, T. (2018). ‘Pros and Cons of an Increase in Economic Growth’.
- Griggs, M. (2017). ‘Why Is the Smog in China So Bad?’.
- Pais, M. (2018) ‘Alternatives to GDP for Measuring Well-Being’.
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