Gross Domestic Product (GDP), which is the total value of all final goods and services produced in a country over a given period of time, is the most common technique of quantifying an economy. GDP can be calculated per capita, which reflects total output per person, or as a proportion of national output over time. Critics of the GDP measurement, on the other hand, contend that it is an antiquated way of study. Economists devised the concept between World Wars in order to quantify the economic damage caused by the Great Depression and compare production capacities between countries. GDP, on the other hand, simply assesses a country’s productive potential, not its entire well-being. As Robert F. Kennedy famously put it, “Air pollution, cigarette advertising, ambulances, jails, napalm, nuclear warheads, and armored cars for police to fight riots in our cities are just a few examples… However, it ignores our children’s health, the quality of their education, and the joy of their play… in short, it assesses everything except what makes life valuable. And it knows everything there is to know about America except why we are pleased to be Americans.”
William Nordhaus, the Sterling Professor of Economics at Yale University, gave another example of the inefficiencies of GDP calculation. In the 1990s, he wanted to see how well GDP reflected changes in living standards, so he devised a method to do so “Over the last 200 years, the “cost of light” has risen dramatically. He tallied up the change in the price of resources needed to produce light over time, from candles to light bulbs, while calculating GDP using one-dimensional analysis. Between 1800 and 1992, the cost of light increased by 3 to 5 times on this basis. However, that system of calculation ignores the fact that each new light-production technology was far more efficient than the preceding one. He then converted his calculations to pennies per lumen-hour and realized that the price of light had dropped by more than a hundred times.
Economists recognized the inefficiencies of GDP over time and sought to build a system of analysis that would provide a more realistic picture of an economy’s health. Economists at the United Nations Development Programme aimed to establish a statistic that would shift the focus of development economics away from national income accounting and toward measures that benefit individuals. These economists believed that people and their talents, not just economic progress, should be the ultimate criterion for judging a country’s development. As a result, they devised the human development index, a summary metric that takes into account three major aspects of human development: health, education, and living standards. Life expectancy at birth, which is factored into the life expectancy index, determines one’s health. The education index is calculated by combining the mean years of schooling with the projected years of schooling. And the GNI index, which measures gross national income per capita, determines living standards. The Human Development Index is derived from the sum of these three indicators.
The HDI places a larger emphasis on human development than the GDP. It considers a country’s quality of life as well as its production capacity. A country’s education and health are regarded as equally essential as its economic power. GDP is viewed as a means, not an end, to human growth. GNI per capita, which is effectively the purchasing power of the average person, is one of the factors used to calculate the Human Development Index. The Human Development Index, rather than GDP, provides a more comprehensive picture of a country. Countries with similar GDPs, for example, can have dramatically varied HDIs. When two countries’ GDPs are similar but their HDIs are not, it can assist policymakers identify the basic issues that need to be addressed in their country, such as education or health. Finally, it portrays changes in living standards throughout time more precisely. For example, if every employee in a country’s tobacco and weapons industries suddenly became academics or joined the health business to treat people, find cures, produce vaccines, and so on, GDP might not improve significantly. The Human Development Index, on the other hand, would shift dramatically to reflect the country’s progress.
As previously stated, GDP was created as a statistic to allow economists to quantify the extent to which the Great Depression harmed economic production and to allow countries to compare their relative power. In times of peace, GDP was never intended to account for technical advancement or the quality of life. Although economists agree that the GDP calculation is far from ideal, there are few better options. In addition to GDP, the Human Development Index takes into account health and education.
Why is HDI the most accurate indicator of progress?
Because it incorporates fundamental social and economic aspects, the HDI provides a more accurate picture of a country’s development. Indicators of the economy. The HDI also highlights the value of individuals and their ability to achieve their full potential.
Why is HDI a good indicator of living conditions?
It is based on three fundamental aspects of human life: longevity and good health, knowledge, and a fair level of living. In these domains, the HDI assesses basic human abilities.
Is HDI superior to GNP?
New wealth values and national economic growth data are required. GNP and GNI are no longer relevant.
The Human Development Index (HDI) is a far superior tool for comparing countries than GNP (gross national product) or GNI (gross national income), however it only provides a ranking on a development scale, not a dollar amount. Bhutan assesses its national situation, with the most important metrics being welfare and happiness.
GNP and GNI are benchmark metrics used by the World Bank and IMF to compare economic growth and development in different countries. These national total GNP figures are inaccurate. It is more rational to examine population growth per capita (GNI) and other metrics. However, compiling these other parameters is difficult.
The difference between imports and exports is used to determine GNP, which is estimated using three distinct methods. GNP data are cited as though they are the most important indicators of a country’s economic development. Even if the situation is not especially social or democratic, a few billionaires and a bigger group of millionaires on the one hand, and many millions of people living in poverty on the other, like in India and China, can nonetheless yield a fair economic growth statistic. Furthermore, the gender gap is not included in the five items below.
Figures for total GNP are based on money flows that have been put together and converted to US dollars. These data need to be adjusted, and it’s past time for new figures to be established on a global scale that better reflect actual development. Here are five ideas to consider:
A. Inflation correction: If the US dollar remains steady and is not devalued, this adjustment works well. All economic numbers must be adjusted to account for inflation in the US dollar. All of these total GNP growth estimates will be exaggerated if they are not rectified. This will be akin to the depreciation of the one-dollar-per-day poverty limit.
B. Informal market: Governments do not evaluate the value of their informal market and do not include it in the total GNP calculation; no product added value is computed, and no taxes are raised on the informal market. Many of today’s high-growth countries were once underdeveloped countries with significant informal markets where large amounts of commodities and services were traded. Many self-supporting people, however, were classified as poor because they earned less than $500 per year. Many millions of subsistence farmers in Africa, South America, and Asia did not count as part of the economy fifty years ago, despite having an acceptable and sustainable standard of life. When estimating total GNP, a reasonable estimate of the total value of the black market, trade, and subsistence farming must be made. If these people join the fiscal system, overall GNP will rise, despite the fact that there would be no economic change.
C. Urbanization: A corn cob may cost a farmer 0.05 to produce, but it costs 1 in a large town’s store due to transportation and trade. As a result, the more urbanized a country becomes, the higher the price level becomes, but without any improvement in food quality. Although a farmer may have a larger home than a city person, the latter’s pricey home is included in GNP since it was built and is serviced within the official market, but the farmer’s home is not. A subsistence farmer can live comfortably on $500 per year, yet the same amount could put an urban person in abject poverty. Countries with a high rate of recent urbanization also have a high rate of total GNP growth. As a result, current GNP estimates indicate a country’s level of urbanization but not necessarily its prosperity.
D. Natural resource exports: When a country’s mineral gold, oil, or hardwood forest resources are made transportable through mining, refining, and sawmills, they represent a value in the country’s economy. When these resources are sold to another country, they are exchanged for virtual or paper money, which, if not properly reinvested within the same country, will lose its value due to inflation. The importance of investment within the country cannot be overstated. A country does not become wealthier by exchanging gold for paper money. These exported resources are included in the current model of total GNP, which includes them in national economic data. When Indonesia exports its hardwood lumber to Japan or Malaysia, or when the same lumber is turned into timber products and sold on international markets, the increased value benefits both the timber workers and the country. A recalculation of total GNP based solely on added value and excluding resource exports would significantly alter the results of countries that currently sell crude oil, raw copper, or other minerals.
E. Population growth: A country with a total GNP of 3.5 percent and 2.5 percent population increase over the same period has an average GNP per capita of just 1%. A more realistic statistic is GNI per capita. The fact that birth rates in many less developed countries are estimated is a concern with this method of measurement. The total GNP of nations with low birth rates, such as France or the Netherlands, can be lower than in countries with high birth rates, although the GNI per capita remains the same. As a result, focusing on total GNP figures is misleading.
The five challenges listed above are some of the reasons why many emerging countries had very low total GNP fifty years ago when compared to fully registered and taxed European countries. Their enormous informal sector was not counted, their natural resources were exported without adding value to the domestic market, and their population was growing rapidly. The value of GNP per capita is heavily influenced by the export of unprocessed natural resources and population growth. These compensatory factors must be calculated throughout all of these years in order to compare growth figures over a longer period. In publishing these corrected growth estimates, the IMF and World Bank should take the lead. Better indicators, such as the HDI, the Bhutan model, or inequality, must be established because people’s social and economic welfare is not just dependent on economic growth.
Why is the Human Development Index (HDI) a better indication of progress than per capita income?
The HDI places a larger emphasis on human development than the GDP. GNI per capita, which is effectively the purchasing power of the average person, is one of the factors used to calculate the Human Development Index. The Human Development Index, rather than GDP, provides a more comprehensive picture of a country.
How useful is HDI?
The Human Development Index, often known as the HDI, is a measurement of human progress and well-being based on a number of different measures. The Human Development Index (HDI) is a broad measure of human development that determines whether a country is developed, developing, or undeveloped. In general, a high HDI is associated with a high quality of life. GDP, life expectancy, adult literacy, and school enrollment are all indicators for HDI. HDI is calculated based on the number of years a person is projected to attend school. A country’s HDI value is a single number that is less than one. Norway, with a rating of 0.944, was declared to have the highest HDI value by the United Nations in 2013.
The map below depicts HDI levels from 2013 in various parts of the world. The information was gathered from the United Nations.
Measuring HDI is useful since it is more strongly connected with quality of life than GDP, because GDP only considers economic concerns, whereas HDI considers three separate aspects of quality of life. Economic well-being, levels of knowledge, and health are the three dimensions. HDI also takes into account the negative consequences of high energy consumption, such as pollution levels from specific fuels. Climate change is also factored into HDI calculations. Due to excessive levels of pollution and climate change, after a certain point of energy use, the quality of life will deteriorate.
Is HDI a reliable indicator of happiness?
We utilize the United Nations Human Progress Index to measure human development in a more holistic way than the usual concentration on GDP in international development. The HDI is made up of per-capita GNI (a measure of economic well-being), average life expectancy (a proxy for health well-being), and projected years of schooling (or educational attainment as a measure of capabilities well-being). HDI is a more comprehensive measure of well-being than those based purely on economic statistics, and it has been widely used to examine human development. It is available for almost all countries and is available for almost all countries.
We utilize net Gini, which is the mean Gini over 5 years (20142018), to quantify income inequality, which lays even more emphasis on the distribution of economic benefits of a society, regardless of how relatively poor or wealthy that society is as a whole. The Gini coefficient is a measure of value dispersion (variance) in a population’s income distribution (or it can be calculated for wealth inequality). The theoretical range of Gini coefficients is 0 (perfect equality) to 1, but in fact, lower values are in the 2040 percent range and higher values are in the 4165 percent range. The Gini coefficient is the most generally used indicator of inequality, and net Gini smooths out year-to-year economic changes.
Grassroots Activism
The Global Non-violent Action Database (Swarthmore College, 2015), the most comprehensive such database accessible, contains thousands of instances and summaries of historical grassroots social movement campaigns and mass actions spanning hundreds of nations, which we painstakingly coded. The Nonviolent Action Product Score in this database combines the number of examples in a country and weights them by their success rate. We compensate for positive skewness among the scores in this study by using the base 10 log of this product score (namely the United States and other positive outliers; for more details, see Hanitio and Perkins, 2017).
Civil Liberties and Political Rights
We use Freedom House’s Civil Liberties (CL) and Political Rights (PR) indexes from their annual Freedom in the World Report for civil and political rights. This report is the result of a combination of resident and non-governmental organization surveys, news article reviews, and Freedom House staff analysis. The indices are based on a number of factors “Elections, political plurality and participation, government functioning, freedom of expression and belief, associational and organizational rights, the rule of law, and personal autonomy and individual rights” We created an overall index by averaging the 2015 CL and PR indices in this study “Score of Liberty.” The most generally used country-level measure of political rights and civil freedoms (17 rating-scale) is Freedom House’s study of 210 countries and territories. Because these two variables have a high correlation (r = 0.98), a single, simple metric can be used to assess the presence of political rights and civil liberties. We reverse coded our Freedom Score so that higher numbers equal more freedom, because PR and CL are coded at the source so that a lower score equals more freedom.
Political Decentralization
The World Bank (Ivanyna and Shah, 2012) produced multiple government decentralization indexes, including fiscal (below), administrative, and other forms of decentralization in 182 countries. It is the only comprehensive set of decentralization initiatives for the federal government. The extent to which local inhabitants are permitted to engage in choices affecting their community is measured using three criteria: (1) election of legislative bodies and (2) executives in local governments by members of the community (rather than appointment by the central government).
Fiscal Decentralization
This is a World Bank-created index reflecting the level of public budgetary decision-making devolved from central to local discretionary authority, similar to political decentralization (Ivanyna and Shah, 2012). Five variables are used to calculate fiscal decentralization: (1) degree of fiscal autonomy allowing local governments to engage in higher-level financing (e.g., bond sales) to close fiscal gaps between expenditures and revenues; (2) ability of local governments to set their own taxation policies; (3) extent to which local governments can use unconditional or formula-based grants and transfers; (4) degree of autonomy in spending decisions; (5) degree of autonomy in borrowing from external sources
Citizen Volunteerism
The Gallup Civic Engagement Index, which is based on Gallup’s regular international interview survey of more than 145,000 adults in 140 countries in 20092010, was used to calculate the percentage of citizens contributing time to a service group. Respondents were asked if they had provided money to a charity, volunteered time to an organization, or aided a stranger or someone they didn’t know who needed help in the previous month. We only used the percentage of the country’s sample who said they volunteered, with higher scores suggesting greater civic participation.
Voter Participation in Parliamentary Elections
We utilize the Institute for Democracy and Electoral Assistance’s global voter database to calculate voter turnout in parliamentary elections from 2009 to 2015. We thought about averaging presidential and parliamentary turnout in each country, but many countries elect prime ministers through parliament. As a result, we exclusively use data on parliamentary voter participation in this study. The fact that we use voter turnout as a percentage of the voting age population (VAP) rather than a percentage of registered voters is an essential limitation. This is due to the fact that “the roll is extremely difficult to keep up to date, and deaths or moves of electors from one district to another are not reflected in the roll, which is a typical problem faced by electoral administrators around the world” (2, par. 5).
What role does HDI play in business?
The Human Development Index (HDI) is a metric for measuring economic progress and well-being. The Human Development Index looks at three main economic development criteria (life expectancy, education, and income levels) and assigns a score between 0 and 1 to each.
- The Life Expectancy Index is a measure of how long people live. Average life expectancy in comparison to the world average.
What the HDI shows
- The HDI is a broad measure of economic progress. It has certain limits and leaves out some aspects that could have been included, but it does provide a rough capacity to compare economic welfare issues – far more than GDP numbers alone can provide.
Limitations of Human Development Index
- Within countries, there is a lot of variation. Countries like China and Kenya, for example, have vastly varying HDI values depending on the location. (For example, north China is poorer than the south.)
- HDI is a long-term indicator that may not respond to recent short-term changes (e.g., life expectancy).
- Higher national wealth does not imply better living conditions. GNI may or may not improve economic welfare, depending on how it is spent. For example, if a country spends more on military spending, it will have a greater GNI, but its wellbeing will be lower.
- Furthermore, a country’s higher GNI per capita may mask substantial inequality. Inequality is considerable in certain nations with higher real GNI per capita (e.g. Russia, Saudi Arabia)
- HDI, on the other hand, can identify countries with identical GNI per capita but varying levels of economic development.
- Economic well-being is influenced by a number of other factors, including the prospect of war, pollution levels, and access to safe drinking water, among others.
What impact does HDI have on a country?
The HDI value should be as high as possible. A high HDI indicates that the country in question has a generally good standard of life, including adequate healthcare, education, and economic possibilities.
How do HDI and GDP relate to one other?
The conclusion is that HDI has an impact on GDP per capita. On the one hand, increasing levels of human development lead to increased opportunities for economic growth; on the other hand, increasing levels of human development lead to increased opportunities for economic growth.
Is PPP used by HDI?
The HDI aims to assess 189 different countries and territories with very disparate price levels. Data must first be transformed into a common currency before being compared between countries. PPP exchange rates, unlike market exchange rates, allow this conversion to account for price disparities between countries. GNI per capita (PPP $) represents people’s living conditions across countries in this way. In theory, one PPP dollar (or international dollar) has the same purchase power in a country’s domestic economy as one US dollar (USD).
In May 2020, the current PPP conversion rates were implemented. They were created using data from the 2017 International Comparison Programme (ICP) Surveys, which included over 176 economies from all around the world and the OECD.