On the planet, there are now 195 countries. Each country is a microcosma world within a world, where people, like the rest of us, face their own difficulties. It’s a world where leaders are doing everything they can to move society ahead for the greater good.
We’ve been taught about competition since we were children. The best student receives the highest grades, and others look up to them in the hopes of following in their footsteps. When you see humans as a whole, with their own countries, you can’t help but wonder: who is the best country on the planet? Of course, the solution is complicated.
However, complex does not imply difficult. Let’s forge a path to the answer to this question.
Gross Domestic Product
GDP, or Gross Domestic Product, is the total monetary worth of all services and finished items generated inside a country during a given time period. It is a measure of a country’s economic health.
The fundamental definition of finished goods is the selling of a finished product that cannot be resold as part of another product. For example, a cook may purchase eggs in order to prepare an omelette that will be sold to a customer. Because the eggs are not a finished product, their value will not be included in the GDP. The omelette will be included in the GDP calculation.
However, if a household purchases eggs in order to prepare an omelette, the eggs will be included in the GDP. Because they eat the omelette, the egg is the final product.
The value of services provided to customers will be included in GDP. Your electrical box, for example, is faulty. You make an appointment with an electrician to come out and fix it. You paid the electrician $50 and he completed the task. The $50 will be included in the GDP calculation.
- Output: This approach calculates the total value added generated by the economy’s production of goods and services. The overall value of the economy is removed from the cost of intermediary items to arrive at the sum value.
- Revenue: This technique counts the overall money generated by the economy’s production of goods and services, including income earned by businesses, employees, and self-employed individuals. This method falls somewhere in the middle of the production and spending methods.
- Expenditure: This method is used to calculate the overall cost of all finished goods and services produced in the economy. Consumers who buy services and goods account for the majority of GDP.
These three approaches should all be interchangeable. That is, all procedures should provide the same or extremely similar results.
Limitations of GDP
The measuring index of a country, such as its GDP, is supposed to be the metric we use to rank countries. The number one country should, in theory, be the best in practically every category. Regrettably, the GDP excels at counting only one thing: value. Here are some of the GDP system’s drawbacks:
Well-Being
Only monetary value is favored by the GDP system. Money isn’t always a good indicator of happiness or human well-being. Happiness is a feeling, not a fixed goal, for individuals who have fought hard to get out of poverty. While money is definitely beneficial, it does not ensure pleasure or well-being.
Environmental Damage
Climate change is here to stay. It’s terrible, dangerous, and unsettling, and worst of all, it’s unavoidable. While sea levels rise, the polar ice caps are melting. Carbon dioxide raises global temperatures, and methane is released into the atmosphere. Countless rural societies are becoming increasingly hostile.
The GDP system would encourage businesses and residents to spend and create as much as possible, regardless of how much pollution clogs the skies, how inefficient machines are, or how the environment suffers when poisonous waste is dumped.
Distribution of Wealth
The GDP system merely tracks how much money is spent. It makes no distinction as to who owns the riches. The wealthiest ten percent of the population can easily control half of an economy’s overall worth.
This has to be acknowledged as a flaw. Monopoly is not a feature of a healthy economy, which is what the GDP system should strive towards. And this type of economy is particularly vulnerable to boom and bust cycles.
Alternatives to GDP
Because GDP can’t account for all of life’s vital measurements, scientists and politicians all around the world have attempted to develop a new gauge to replace it.
Human Development Index
The Human Development Index (HDI) is a composite statistic that includes educational attainment, life expectancy, and per-capita income. Mahbub ul Haq, a Pakistani economist, created the HDI in 1990. The HDI system is the first to place a premium on people’s happiness rather than their economic power.
Long and Healthy Life
Life expectancy is the most important component in this dimension. From birth to death, life expectancy at birth is the average length of life for certain people born in the same year.
Knowledge
The projected years of schooling and the average years of schooling are two criteria in this measure. The number of years a child of a certain age can expect to receive age-appropriate education throughout their lives is referred to as expected years of schooling. The average years of schooling refers to the quantity of education students over the age of 25 have obtained.
Decent Standards of Living
With 2011 Purchase Power Parity norms, the key aspect at play is Gross National Income per capita. GNI is the total amount of money earned by the country’s inhabitants and enterprises, divided by population density and translated to 2011 PPP dollar rates.
Norway is the most populous country in the world. Germany is rated fourth in the world. The United States of America is placed fifteenth. Japan is rated twentieth in the world.
Genuine Progress Indicator
Genuine Progress Indicator (GPI) is a metric for assessing a country’s prosperity, as it relates to the health of its economy, by combining ecological and social characteristics that aren’t measured by GDP (GDP).
GPI has been proposed as a replacement or supplement to GDP as a measure of financial development. The relationship between GDP and GPI is analogous to the relationship between an organization’s gross and net benefit.
The net profit is calculated by subtracting the gross profit from the costs incurred, whereas the GPI is calculated by subtracting the GDP from the natural and social expenses. If the monetary costs of poverty and pollution are equal to the profit from the production of goods and services, the GPI will be zero, providing all other factors remain constant.
Key Points
- In essence, GDP places an excessive emphasis on total wealth while disregarding other critical human and environmental factors.
- The HDI, which considers life expectancy, education length and quality, and living conditions, is a viable alternative to the GDP approach.
- Another option is the GPI system, which considers ecological when calculating a country’s total worth. A country with low pollution levels and a moderate economy will have a higher GPI index.
What is the best GDP substitute?
According to the World Bank’s savings study, factors such as public resource revenue investments and the societal costs of environmental emissions are equally important in influencing overall savings levels.
Pros: The GSI promotes natural resource conversation in a language that finance policymakers understand.
Cons: This is a fundamentally faulty approach of gauging economic health unless instruments to accurately quantify it are developed.
What is the most accurate economic indicator?
Gross domestic product, or GDP, is the most complete measure of overall economic performance, as it represents the “output” or total market value of goods and services produced in the domestic economy during a certain time period.
What metric is more accurate than GDP per capita?
The IWI is a useful tool for tracking progress toward sustainable development in addition to GDP. Its use will aid in the development of countries’ capacity to measure the whole range of assets available to them in order to achieve sustainable development, as required by Target 17.19 of Sustainable Development Goal (SDG) 17. It can also help to ensure that economic development is long-term. The index will assist policymakers in making decisions related to sustainable development and staying within planetary boundaries by measuring the evolution of stocks of produced capital, natural capital, and human capital through time.
The economy of a country may appear to be thriving its GDP may be increasing but at what cost? This question is answered by the IWI. To do so, the IWI monitors the progress of 140 nations that account for the majority of the world economy ($56.84 trillion) and population (1.4 billion people) (6.89 billion people). The index takes into account each country’s stock of assets – its manufactured, human, and natural capital and evaluates how these assets have changed over the last 25 years. It’s a vast database that spans nearly a generation. (The IWI excludes fifty nations with small economies due to the difficulties in acquiring good data.) According to the most recent IWI study, 44 out of 140 countries have experienced a drop in inclusive wealth per capita, despite the fact that GDP per capita has climbed in nearly all of the nations studied. This indicates that, despite the fact that their economies appear to be rising, these 44 countries are not on a road to sustainable development. These countries are rapidly diminishing their natural, human, and/or generated capital stocks, putting future generations at a disadvantage. The worldwide per capita natural capital has been declining since 1992, as indicated in the graph below.
IWI is a multi-purpose, multi-target, integrated indicator of sustainable development that can assist minimize the number of global indicators needed to track the SDGs. A rise in IWI will signal progress in eradicating poverty (SDG 1), achieving food security while promoting sustainable agriculture (SDG 2), and promoting healthy lives and human well-being (SDG 3). (SDG 3). Increased IWI also means more inclusive and sustainable economic growth (SDG 8) and sustainable consumption and production habits (SDG 12). Failure to protect, restore, and promote the sustainable use of terrestrial ecosystems, combat desertification, reverse land degradation, and halt biodiversity loss (SDG 13); failure to conserve and sustainably use the oceans, seas, and marine resources (SDG 14); and failure to protect, restore, and promote the sustainable use of terrestrial ecosystems, combat desertification, reverse land degradation, and halt biodiversity loss (SDG 15). (SDG 15). In addition, the IWI can assess the effectiveness of implementation tools (such as policies and programs) for encouraging long-term development (SDG 17).
The IWI’s main strength is its ability to be used as an indicator for sustainable development policy. The index can assist policymakers prioritize investments and detect policy and resource trade-offs associated with decisions about sustainable development by highlighting a country’s existing productive base, whether that base is employed to meet economic, social, or environmental goals. With the introduction of the SDGs, governments must strive more than ever to develop environmental accounting and, as a result, be better able to use the IWI as a vehicle for policy change. We may get one step closer to acknowledging natural capital’s contribution to and impact on attaining sustainable development by assessing natural wealthan untapped and unappreciated wealth reservoir.
Which is the most accurate metric? GDP vs. GNP
While gross domestic product (GDP) is one of the most often used economic indicators, gross national income (GNI) may be a better predictor of a country’s overall economic health if it incorporates significant foreign investments. This is because the GNI estimates an economy’s total income, regardless of whether it is produced by citizens within the country’s borders or acquired from overseas corporate investments. Due to the fact that they measure various things, GNI and GDP might differ significantly.
Which is the more accurate indicator of economic progress?
This gauge of progress was also acknowledged by UN experts in their study on “Measures of Economic Development of Underdeveloped Countries.” In computing national income statistics, Charles P. Kindleberger proposed the same procedure with adequate precautions.
Economic development aims to improve people’s living standards and, as a result, their consumption levels. Per capita income, rather than national income, can be used to estimate this. If a country’s national income rises but its per capita income does not, the people’s living standards will not improve. As a result, per capita income is a more accurate indicator of economic development than national income.
Increases in per capita income are a solid indicator of economic progress. Because the growth rate of national income is greater than the growth rate of population in advanced countries, per capita income has been steadily increasing. This has improved the people’s economic situation. In developing countries, per capita production capacity is quite low. As a result, as these economies’ capacity to create grows, they progress toward economic development.
What is the most accurate indicator of a country’s progress?
“Development can be viewed as a process of increasing people’s true liberties.” Sen, Amartya
The expansion of a country’s economy is measured by economic growth. Today, policymakers and scholars alike commonly quantify it by rising gross domestic product, or GDP. This metric calculates a country’s value added, which is the total value of all products and services produced minus the value of goods and services required to produce them. The GDP per capita is calculated by dividing this metric by a country’s population to determine how productive and developed an economy is.
A brief history of growth and GDP
Economic growth is derived from classical economics, where an increase in national income signifies an increase in a nation’s wealth the traditional metric of success. During the industrial revolution, when market economies blossomed, the concept of economic growth gained prominence. Simon Kuznets, a Nobel winner, wrote extensively about national statistics in the 1930s and promoted the use of GDP as a measure of the US national income. “The national income total is thus an amalgam of relatively accurate and only rough estimations rather than a unique, extremely precise measurement,” Kuznets stated, taking this measure with a grain of salt (Kuznets, 1934).
Governments were looking for analytical methods to raise taxes to fund the newly minted war machine against the backdrop of a brutal world war. GDP became the standard metric for measuring a country’s economy at the 1944 Bretton Woods conference. The concept of development has always been linked to economic expansion, i.e. the accumulation of wealth and the creation of products and services, from the classical through the neo-classical periods.
Finally, with the close of World War II, in 1945, the concept of emerging countries became a focal point of public policy. In his inauguration address in 1949, US President Harry Truman characterized “underdeveloped countries” as a bigger portion of the world, and stressed that growth should be based on “democratic fair-dealing” (Truman announces Point Four program).
The dominance of GDP as a measure of economic growth today is due in part to the fact that it is easier to quantify the production of goods and services than it is to measure other welfare outcomes with a multi-dimensional index. Because of this, GDP is not an appropriate indicator of a country’s development on its own. Development is a multi-dimensional notion that encompasses not only an economic but also social, environmental, and emotional aspects.
Towards inclusive and sustainable growth
One of GDP’s shortcomings is that it solely considers average income, which does not reflect how most people live or who benefits from economic growth. Thomas Piketty (2014) proposes a two-pronged hypothesis for how a society’s wealth grows more concentrated and why this is harmful to development:
- The first law states that when the rate of return on capital (profits, dividends, interests, and rents) exceeds the rate of economic growth, inequality rises.
- According to the second law, continuous rises in the capital-to-output ratio concentrate income in the hands of capital owners at the expense of employees (return of capital surpasses the return of labour, i.e. wages).
Piketty examines a large number of data sets, although they are all limited to industrialized countries. He contends that these principles explain capitalism’s fundamental market failings. These shortcomings should be addressed by government intervention in the form of:
Growing inequalities, if allowed unchecked, might not only stifle prosperity, but also create instability and disorder in society, jeopardizing the very foundations of free democracy. As the wealthy amass ever more capital and wealth, economic and, as a result, political power becomes increasingly concentrated in the hands of a few wealthy individuals. As a result, policy-making processes are skewed to favor the interests of these wealthy elites.
As a result, a rising GDP cannot be believed to automatically lead to long-term development. On the other hand, Piketty’s so-called “basic rules of capitalism” have been widely criticized due to miscalculations in savings and depreciation rates (Mankiw, 2015; Milanovic, 2016).
The Human Development Index
The Human Development Index (HDI), devised by the United Nations Development Programme, is one enlarged indicator that aims to quantify the multi-dimensional element of development (UNDP). The index was created by Mahbud ul Haq and Amartya Sen, and it is better suited to tracking the progress of both rich and poor countries.
The first HDI report was published in 1990. It takes into account the traditional method of assessing economic growth, as well as education and health, which are important factors in establishing a society’s level of development. This is derived by using the geometric mean of GDP per capita, life expectancy at birth, and the average of mean and predicted schooling years.
The Human Capital Index
The Human Capital Index was established by the World Bank on October 11th, 2018. (HCI). This newly established index rates 157 nations on a set of four health and education variables based on a calculation of the economic output lost as a result of poor social outcomes. The key advantage is that, like the Social Progress Index (SPI) and unlike GDP, it focuses on results rather than inputs. For example, educational quality is more correctly weighted against years of schooling when measured by actual adjusted learning. The main objection leveled about the HCI is that it risks overvaluing the pecuniary benefits of education and health care, so commoditizing people rather than their societal contributions and intrinsic status as basic human rights. Nonetheless, it is expected that the HCI will be used primarily by developing countries to quantify the outcomes of social sector investments, thereby increasing spending on human development (health, education, social security, and so on), which the World Bank claims has been overlooked in favor of infrastructure and institutional development.
The Social Progress Index
The SPI is a superior means of gauging societal growth, in my opinion. The SPI was created by the Social Progress Imperative, a non-profit organization. It’s one of the Commission on the Measurement of Economic Performance and Social Progress’s or simply Stiglitz-Sen-Fitoussi, after the commission’s leaders outcomes. The Commission’s major goal was to look at how countries’ wealth and social development may be quantified in ways other than the one-dimensional GDP measure. It is still a relatively new indicator, with data only going back four years, but it covers a large number of countries, totaling more than 130.
The SPI is a modification of the HDI in that it increases the number of composite indicators from four to fifty-four in a wide range of categories, such as basic human requirements, foundations of well-being, and possibilities for advancement. As a result, this index can synthesize the most important aspects that influence development. Access to water and sanitation, educational and health results, public criminality, housing, information access, and communication are only a few examples. Naturally, the SPI’s biggest flaw is its relative complexity and lack of applicability when used to advise policymaking.
Economic growth as freedom
Sen’s (2000) concept of economic growth as a successful way of extending personal and societal freedoms the impact it has on people’s lives lies at the heart of the SPI. Consider the following scenario:
- participation in commerce and manufacturing as well as access to economic opportunities.
As a result, development entails the abolition of restrictions on liberty that limit people’s choices and opportunities to express agency in their own lives.
2. A multi-dimensional approach to development
The SPI has a significant additional value in that it incorporates a variety of subjective indicators that are sometimes overlooked in economic debates. Political rights, freedom of expression, assembly, and religion, corruption, tolerance for minorities and immigration, and discrimination and violence against them are among them.
There isn’t a single factor of the index that degrades a country. Instead, a combination of variables provides more information on a country’s level of development. It is unsurprising that developed countries are at the top of the table; nonetheless, some of the world’s wealthiest countries still trail behind in certain developmental indicators. The United States, France, Italy, Russia, Brazil, and China all received low marks.
3. Development vs. economic growth
There are three key reasons why countries do poorly in comparison to their economic size:
The SPI does not capture the third reason, but it does capture the first two. Poverty and inequality are becoming widely contested in academic literature, not only because of their detrimental effects on human development, but also because they stifle GDP growth.
Economic growth: for whom?
Is the average worker’s situation improving? Economic growth, as measured by GDP, is a useful supplementary indication of development, but it is not sufficient on its own. Modern capitalism’s task is to strike a balance between its function as an efficient and successful method of production and its proclivity to concentrate income, money, and thus power. Indeed, social growth will lead to economic progress, and the SPI is a welcome addition to development measures in this regard.
GDP measurement may be strengthened if it included not only physical capital, but also natural and human capital. Economic development in its pure accounting format (GDP expansion) will always result in less inclusivity and a generalized sense of societal discontent, which is harmful in democratic countries when it is divorced from social progress.
As a result, when used to gauge development, the present measure of economic growth, GDP, has significant drawbacks. The SPI can be considered as a more appropriate indication given the multi-dimensional character of development.
References
L. Burman, J. Rohaly, and R. Shiller (2006). The Rising Tide Tax System: Indexing for Changes in Inequality (at Least Partially). http://www.econ.yale.edu//shiller/behmacro/2006-11/burman-rohaly-shiller.pdf is available.
N. G. Mankiw, N. G. Mankiw, N. G. Mankiw (2015). “Yes, r exceeds g. pp. 43-47 in American Economic Review, Vol. 105, No. 5.
E. Matthew (2008). Masters Dissertation, Singapore Management University, Stock Markets and Income Inequality: A Cross-Country Study.
B. Milanovic (2016). LIS Working Papers No. 663, LIS Cross-National Data Center in Luxembourg, Increasing Capital Income Share and its Effect on Personal Income Inequality.
L. Mishel, L. Mishel, L. Mishel, L. Mishel “Economic Policy Institute, “The Wedges Between Productivity and Median Compensation Growth,” Issue Brief #330.
T. Piketty, T. Piketty, T. Piketty, T (2014). Harvard University Press, Cambridge, USA, has published Capital in the Twenty-First Century, translated by Arthur Goldhammer.
T. Piketty and G. Zucman (2015). In the Long Run, Wealth and Inheritance, Handbook of Income Distribution, Vol. 2. Anthony B. Atkinson and Franois Bourguignon edited the book. Elsevier, Amsterdam, Chap. 15, pp. 13031368.
Why is GDP a poor indicator?
GDP is a rough indicator of a society’s standard of living because it does not account for leisure, environmental quality, levels of health and education, activities undertaken outside the market, changes in income disparity, improvements in diversity, increases in technology, or the cost of living.
Is GDP a good economic indicator?
GDP is a good indicator of an economy’s size, and the GDP growth rate is perhaps the best indicator of economic growth, while GDP per capita has a strong link to the trend in living standards over time.
Is GDP a reliable indicator of economic performance?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
Is it more accurate to use GDP or GNI?
GDP, or Gross Domestic Product, is a measure of the total value of all products and services generated in a country over a given time period, usually a year. GNI is a more accurate measure for some countries than gross domestic product (GDP) when it comes to assessing and tracking a country’s wealth. The Bureau of Economic Affairs (BEA) of the United States monitors GDP to assess the economy’s health year after year. The two figures do not differ considerably. Finally, there’s GNP, which is a broad measure of all economic activity.