GDPas a Sufficient Measure of Economic Progress and Quality Of Life in aCountry
Gross Domestic Product (GDP) acts as a measure of the economic output(total final market value of the goods and services generated withina nation for a specific period). The topic on GDP is relevant for mebecause it is the most used measure of economic activity, frequentlymeasured on a quarterly or annual basis. Organizations such as IMF,World Bank, and UN evaluates the progress of a country by comparingits GDP with that of its peers. In essence GDP measures allinvestments, consumption, government spending and the total exportsless the total imports. GDP is a market measure meaning that value ofdifferent dimensions indicated above is computed regarding theirconceived market prices. Economic factors that do not have any pricetag are not factored in in the GDP of a country. This means that GDPexcludes important economic performance factors such as the ‘core’economy that include informal economy, service provided in thehousehold, odd jobs, and the voluntary activities that facilitateeconomic growth and promote social cohesion. The IMF statisticsindicates that informal economies make up to 45% contribution in theoutput of the developing country’s economy, 30% in developingeconomies and 20% in more industrialized countries (Costanza et al44). Given that GDP does not factor in all economic capital input,this study seeks to answer the question: Is GDP a sufficient measureof economic progress and quality of life in a country?
Limitationsof GDP as a Measure of Economic Progress and Life Quality
GDP serves as a market throughput’s estimate. It adds together thevalue of the goods and services that are traded for money for aparticular time. Typically it sums up total personal expenditure onconsumption, expenditure by the government, net capital formation,and net exports. Figure 1.0 below illustrates a representation of thecircular flow of expenditure and income in a market economy (Costanza23).
GDP is usually based on the survey data and estimates, which aremaintained in the System of National Accounts (SNA). The accountcontains comprehensive economic data gathered at regular intervals.The quarterly and annual GDP estimates are usually extrapolated fromthe economic census data in combination with the annual economicsurvey data that include housing starts, retail sales, and themanufacturer shipments (Costanza 42).There is nothing wrong withusing the GDP. It acts as a valuable economic indicator that acts asan important tool that guides making of economic policy. Given theimplicit connection between the economic growth and well-beingaspects such as consumption and employment, GDP is considered a proxyindicator of human wellbeing and development. In the current nationalaccounts framework, the information covered by the GDP could bebroadened by emphasizing exploring on indicators like adjusteddisposable income that factors in public services that are offered byhouseholds such as social transfers in kind (Giannetti 12-14).
However, the way in which GDP accounts for the environmental andsocial issues in evaluating the growth of the economy isquestionable. GDP does not consider various elements that areinstrumental in determining the national wealth and quality of life.For instance, the measure overlooks the value of some non-marketedgoods and services like unpaid activities, natural resources, andleisure. The GDP per capita only highlights the average income thatmay not commensurate with the actual income of a given populationsegment. Average income offers indication concerning incomedistribution among the citizens. GDP places main focus on short-termactivities as opposed to longer-term sustainable developments factorssuch as the growth of human and natural capital. As such onelimitation of GDP is measuring only the monetary transactions andthereby fails to give a complete picture of the system in which thehuman economy functions. Another issue raised about the GDP is its‘threshold effect’. According to Costanza, et al., (44) increasein GDP leads to an increase in life quality but up to a certain pointbeyond which an increase in GDP is offset by the costs that areconnected to the loss of leisure, increasing economic inequality anddepletion of natural capital. On addition to this Giannetti (18)noted that GDP conceals disparity between rich and poor.
There are some ways that have been proposed for measuring thenational progress, following the realization that usually, GDPmeasures economic quantity as opposed to economic quality. Theproposed measures also address the concern that GDP places emphasizeon quantity which encourages the depletion of the natural and socialcapital. The alternative measures can be categorized into: (1)measures that make ‘correction’ to the existing SNA and GDPaccounts (2) measures that evaluate aspects of human well being(3) the composite measures that combine the two approaches (Bleys356). Indices that try to correct the GDP include The GenuineProgress Indicator, Sustainable Economic Welfare Index, GenuineWealth, and Green GDPs. However, given that these measures are mainlybased on economic data just like GDP they have limitations such assubjectivity in deciding benefits and expenses, lack of consensus onmeasuring un-monetized items, and lack of consensus on a quantifyingcost of depleting the natural resources (Costanza 32-38).
Indexes that do not use the GDP include Ecological Foot Print,Subjectivity Wellbeing, and Gross National Happiness. The compositemeasures include Human Development Index, Living Planet Report, andHappy Planet indicator (Delhey 192-198). Although there are problemsthat have been raised for using the GDP, there still existsignificant barriers that prevent implementation of the proposedalternative methods. Some of the barriers include lack ofdependability and reliability of the proposed alternative methods,the domination of the ‘Growth is Good’ paradigm, poor politicalleadership, and the concern in maintaining the status Quo (Costanza44).
Even though there are other measures of the quality of life andeconomic progress that have been proposed, GDP remains the most usedindicator of economic growth. GDP has gained dominance over the othermeasures following its global recognition as a means of comparingeconomic performance. However, as a measure of economic progress, GDPdoes not give a full picture of the aggregate economic performance.In some economies, especially the developing ones, there are verymany activities that are not factored in the national outputcomputation, yet they have a significant impact on the nationaleconomy. This means that GDP only represents the formally recognizedoutputs, whereas in some cases informal sector contributes more tothe economic progress and social well-being than the formal economy.However, even though GDP has been found to have limitations, theproposed alternatives indices also have the same limitations as theGDP or only tries to measure one aspect of the society. As such,despite many limitations, GDP is a sufficient measure of economicprogress and quality of life in a country.
Bleys, Brent. "Beyond GDP:Classifying alternative measures for progress. “SocialIndicators Research 109.3(2012): 355-376.
Costanza, Robert, et al. "BeyondGDP: The need for new measures of progress." (2009).
Delhey, Jan, and Christian Kroll."A “Happiness Test” for the New Measures of NationalWell-Being: How Much Better than GDP are they?" HumanHappiness and the Pursuit of Maximization.Springer Netherlands, 2013. 191-210.
Giannetti, B. F., et al. "Areview of limitations of GDP and alternative indices to monitor humanwellbeing and to manage eco-system functionality. “Journalof Cleaner Production 87(2015): 11-25.