GDP quantifies the monetary worth of final goods and services produced in a country over a specific period of time, i.e. those that are purchased by the end user (say a quarter or a year). It is a metric that measures all of the output produced within a country’s borders.
Is GDP a good indicator of 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.
What does GDP stand for, and why is it calculated?
The Gross Domestic Product, or GDP, is one of the most important indicators of an economy’s health. It’s a way of measuring – or attempting to measure – all of a company’s, government’s, and individual’s activity in a given economy.
Why is GDP such a good indicator of progress?
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.
What is GDP and how is it calculated?
Gross domestic product (GDP) equals private consumption + gross private investment + government investment + government spending + (exports Minus imports).
GDP is usually computed using international standards by the country’s official statistical agency. GDP is calculated in the United States by the Bureau of Economic Analysis, which is part of the Commerce Department. The System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, and the Organization for Economic Cooperation and Development (OECD), is the international standard for estimating GDP.
How do you assess progress?
The Human Development Index (HDI) is used to assess progress. The United Nations calculates the HDI. It calculates each country’s average life expectancy, educational attainment, and income.
What is the most accurate indicator of a country’s progress?
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.
What are the three methods for calculating GDP?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
What are the two factors that GDP looks at?
GDP measures the overall income of everyone in the economy as well as the total expenditure on the economy’s products and services output.
What’s the difference between NDP and NNP?
Net Domestic Product is abbreviated as NDP, whereas Net National Product is abbreviated as NNP. NDP is an annual measure of a country’s economic production that is adjusted for depreciation.
What does GDP mean?
This article is part of Statistics for Beginners, a section of Statistics Described where statistical indicators and ideas are explained in a straightforward manner to make the world of statistics a little easier for pupils, students, and anybody else interested in statistics.
The most generally used measure of an economy’s size is gross domestic product (GDP). GDP can be calculated for a single country, a region (such as Tuscany in Italy or Burgundy in France), or a collection of countries (such as the European Union) (EU). The Gross Domestic Product (GDP) is the sum of all value added in a given economy. The value added is the difference between the value of the goods and services produced and the value of the goods and services required to produce them, also known as intermediate consumption. More about that in the following article.