Wednesday, January 15, 2014

Why GDP is not useful

By Maggie Schauer

GDP or gross domestic product is one measure of an economic well-being. It is the total value of all final goods and services produced in a country in a given year. In a period of macroeconomic expansion a country produces more than it did before and GDP goes up. In a period of contraction the country produces less and GDP goes down. GDP was first developed by Simon Kuznets for a US Congress report in 1934. After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the production approach, the income approach, or the expenditure approach. While GDP is seen valuable by some economists, others argue that it fails to account for too much to be valuable.
The major disadvantage of GDP is that it is not a measure of the standard of living in an economy. Standard of living is defined as the level of wealth, comfort, material goods, and necessities available to a population. Some factors of standard of living include income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities, inflation rate, number of vacation days per year, access to quality healthcare, quality and availability of education, life expectancy, incidence of disease, cost of goods and services, infrastructure, political and religious freedom, environmental quality, climate and safety. The standard of living is closely related to quality of life. GDP is one factor of the standard of living but it cannot measure the standard of living alone.
Next, GDP does not account for variances in incomes between different demographic groups, or the distribution of wealth. For example, if an extremely wealthy person receives almost all the production of US GDP and the remainder of the population receives almost nothing, then the country’s overall well-being won’t be too high. The wealthy person has great welfare, but everyone else’s is pretty miserable.
GDP also excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated. For example, babysitting is not included in GDP because it is not provided through the market. Other examples are cooking, cleaning, and home repairs. All these excluded services make GDP a less reliable measurement of the economy. Along with household production GDP cannot account for the underground economy. This includes the black market where transactions are illegal, tax-avoiding, and unreported, causing the GDP to be even more underestimated.
Another big complaint is that GDP understates true economic growth, for instance, computers. Although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same product. This happens with many products today.
Finally, GDP is a poor measure of social progress because it does not take into account harm to the environment. Environmental quality is often diminished with increased economic production. This reduction in environmental quality, which can reduce welfare, is seldom included in the measured production of GDP.
Other things GDP cannot account for are suicide rates, crimes, family breakdown, loss of leisure time, cost of commuting to work, lack of civility in communities, and lack of concern of for future generations. We cannot assume that life conditions are being improved just because more money is being spent. For this reason other measurements should start to be used to truly measure the economy. The Fordham Index of Social Health measures 16 socio-economic indicators. These include:
1. infant mortality
2. child abuse
3. child poverty
4. teen suicide
5. drug abuse
6. high school drop-outs
7. average weekly earnings
8. unemployment
9. health insurance coverage
10. poverty among elderly
11. health insurance for elderly
12. highway deaths due to alcohol
13. homicides
14. food stamp distribution
15. housing
16. income inequality

Other indicators that accurately show the standard of living and social and environmental factors can be found on http://www.consultmcgregor.com/documents/resources/GDP_and_GPI.pdf
Overall, GDP should be used to measure the economy, but not solely. In order to fully see how a nation is doing, other indicators should be used alongside GDP.


Works cited:


5 comments:

  1. "The major disadvantage of GDP is that it is not a measure of the standard of living in an economy." This was really interesting to hear. A country can have a good GDP but that doesn't necessarily mean that they have good lives. Just like you said one person can make 95% of a country's wealth which will make it seem like they have a high GDP but in reality everyone else could be suffering. This was a really interesting topic and a new way to look at our country!

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  2. Although you bring up some good points about why GDP isn't a good way of measuring the standard of living, or that it doesn't quite account for everything in the economy, you can't really expect one type of "measuring device" to do everything that you listed as disadvantages. I agree with you that the GDP isn't a very good indicator, and you brought up really well thought-out points, but at the same time there will never be a tool that you can use to account for all the things you listed. There will always be people who don't do things legally, and surely you can't expect every set of parents to report it each time they hire a babysitter.

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  3. You bring up a very good point here - GDP is not a very accurate tool for measuring a country's economy. But, Kelly also brings up a great point - one tool can't be expected to capture all of the factors contributing to a nation's economy. However, if GDP was modified to include more of these contributing factors, the wealth of a country could more closely reflect it's actual wealth.

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  4. This is very well written, Maggie. You bring up several valid points as to why GDP isn't, as many think it is, a valuable tool as a end-all-be-all measure of nations wealth. It lacks the multiple dimensional depth that such a tool would need. It is, however, an effective and easily accesible statistic, and that is why I feel it is used so often. People just give it more leverage and measure than its due.

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  5. Maggie you propose a very interesting topic. As Kelly stated, GDP by itself cannot capture all the factors of our economy. The list of 16 factors demonstrated the extent to which GDP fails to meet the necessary expectations which proved to be very helpful.

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