The importance of GDP indicator for assessing the effectiveness of the economic policies - Essay Example

Should raising GDP be the primary objective of economic policy? Introduction Gross domestic product can be defined as the total value of all goods and services produced by a country within a specific period of time. It is considered as an important indicator in determining the growth and development of the country. GDP should be considered as one of the objective of the economic policy. The improvement of GDP per capita is useful for measuring the performance of the society. The other economic policy is required to be considered for the development of the economy. The national income and product accounts form the basis of measuring the Gross Domestic Product of the country or the nation. It assists the economist and the policy makers to analyze the impact of the fiscal and monetary policy, economic shocks which include rise in oil prices, the spending plans and tax on the overall economy. It measures the confidence of the government, people and companies, if they are spending it indicates that the economy is prospering and on the other hand if no one is spending it symbolizes that the economy is contracting. When the country or a nation is on its growth phase it experiences increase in its wages and low unemployment rate on the contrary it projects a negative picture when the investors resist in making investment and when the stock prices are likely to fall in the market because the companies are not able to make money due to slow economic growth. Discussion Implication of rise in GDP GDP is considered as an important indicator for determining the progress of the economy. The governments of the world regarded it as one of the statistical tool which can determine whether the economy is progressing or deteriorating. It is an economic index of the entire economic output of the country. It establishes relationship among many other things which includes the shipments of the manufacturers, construction spending, farmers’ harvest and retail sales. It is a figure that converts the national economy into a single data by surpassing the density. The conventional approach of GDP explains that more it grows, the better the country or the citizens of the country are performing. But it is creating a problem in its implementation in the recent years since the economist observed that it provides misleading and inaccurate gauge of prosperity. It is mainly criticized in Europe and by many groups such as the Organization for economic cooperation and development. Key performance indicator of economic policy The key performance indicator of the economic policy of the country mainly includes the economic growth, inflation, unemployment rate, labour force, balance of payment, distributed income etc. The economic policy is required to promote sustainable economic growth by expanding the productive capacity and increasing the potential output of the country over a particular period of time, income distribution by imposing tax on the richer section of the people and providing benefit to the lower or the poor section of the society, maintaining a low and consistent rate of inflation, providing more employment opportunities to reduce the rate of unemployment in the country. GDP includes most of the indicators, therefore it can be considered as one of the objective of the economic policy. Measuring economic progress Gross domestic product is measured by adding the personal consumption expenditure of the economy or the nation which includes the payment made by household for the goods and services, net exports that is determined by subtracting the value of imports of the country from the value of exports of the particular country, government expenditure which comprises of debt payments, infrastructure, public spending for the provision made for the goods and services and the formation of net capital that is increase in the value of total stock of monetized capital of the nation. Figure 1: Traditional approach of the economic activity GDP measures the circulation of goods and services produced by the economy within the market. The non market production is also included for measurement of the Gross Domestic Product of the concerned country such as the nonprofits spending on health care and emergency housing and defence spending by the federal government. But it does not considers some important activity which includes the formation of social capital, volunteer work, increasing population prison, cost of crime and the depletion of natural resources. GDP is sometimes misused as a score card for the well being and development of the nation. It is required to take into consideration the evolution of the current system. GDP cannot be termed as useless, since it measures what it is expected to measure, but it is often misused as an economic indicator. The main criticism faced by GDP in measuring the economic progress of the country is that it measures only monetary transaction related to the production of goods and services. This measurement encourages the depletion of natural resources as compared to the renewal of the resources. It improves the quality of life up to a certain point of time and beyond that particular point the increase in GDP will lead to the increase in the cost associated with depletion of the natural capital of the country , increase in the loss of leisure time and income inequality. It does not measure the economic growth and development, it measures the economic growth of the nation but it fails to reflect the economic activity within the nation. It fails to take into consideration the economic activity within the nation. Economic indicators beyond GDP The economist identified some of the limitations of the GDP, since it fails to indicate the economic progress of the country or the nation. It mainly measures the transaction that takes place in the market and it ignores the environmental impacts social cost and income inequality. The economist and the analyst identified that when a business applies GDP style of accounting, it mainly aims in maximizing the gross revenue generated out from the business at the cost of flexibility, profitability, sustainability and efficiency. But this approach is not sustainable. When GDP was emerged seven decades ago, it was considered as the most useful method in measuring the economic growth and progress of the nation, the increase in economic activity included increase in the employment opportunities, rise in income, and provision of various amenities for reducing social conflict and prevent world war. The limitation of GDP in the present scenario is, increase in crime rates in the country or the nation do not raise the standard of living but it can increase the rate of GDP by raising the expenditure incurred on the security systems. The destruction of the horizon oil spill in the year 2010 and the hurricane sandy in the year 2012 led to the increase in the rate of US GDP since it stimulated rebuilding.1 Alternative economic indicators The limitations or the drawbacks of the GDP suggest for the alternative method of measurement. The economist suggests GPI which is known as Genuine Progress indicator, Sustainable economic welfare, genuine Wealth and Green GDP. The index of Sustainable economic welfare was modified and renamed as Genuine Progress Indicator, it is considered as the measure that considers GDP as the base. Various attempts have been made for improving the Green GDP. This indicator is developed with the purpose of overcoming the limitation of GDP such as depletion of the natural resources of the country or the nation. This calculation mainly developed for countries which include China, Australia, Canada, and Indonesia, Papua, Costa Rica, New Guinea, Mexico and US. Genuine Savings were introduced for the World Bank with the purpose of defining the actual saving of the particular country after depreciation of the produced capital, depletion of minerals, forest and energy, investment in human capital and the damages from the global and local air pollutants are taken into consideration. Figure 2: Percentage of wealth measured by Genuine Savings The above diagram measures the social and human capital, natural capital and the produced capital of the countries. In order to measure the economic growth on the basis of the three aspects of capital, the countries are categorized into three income groups that are low income countries, middle income countries and the high income OECD countries. The indexes that do not use GDP as a base measures the economic activity of the country or the nation on the basis of the social or the environmental activities, changes in the social, environmental and human capital and the well being of the society as a whole.2 Comparison of GDP and GPI Gross Domestic Product is measured by considering the current income. GPI is introduced or developed with the purpose of measuring the sustainability of income required for the purpose of measuring or determining whether the progress is the result or output of the interest of the community capital or decreasing the level of spending. Both GPI as well as ISEW use the personal consumption data as applied by the GDP but the former makes deductions for considering the inequality in income, environmental degradation, and cost of crime and also the services from the public infrastructure and consumer durables as well as the advantages of the housework and volunteering. By distinguishing between the various economic activity that diminishes the social and the natural capital and activity that enhances such capital, the Gross Progress Indicator are designed for measuring the sustainable economic welfare rather than measuring only economic activity of the country or the nation. The adjusted economic measures are expressed in monetary units more readily as compared to GDP. The adjusted economic measures are expressed in monetary units as compared to GDP. This index considers the net savings wealth and the annual income. The environmental benefits and the cost are factored in. The Gross progress Indicator is calculated by considering the personal consumption expenditures. Unlike GDP, GPI considers the income distribution. An increase in income of the poor people increases the welfare of the economy rather than considering the increase in income of the rich people. An increase in gap between the income of the rich and the poor people results in increase in social problems such as increasing rate of drug abuse, poor mental and physical health , mistrust and incarceration of United States, Indian and China. Comparing GDP and GPI per capita of 17 countries comprises of the divergences between two metrics. Figure 3: Genuine progress The above diagram represents the comparison of two different metrics or economic indicator from the period ranging from the year 1950 to 2000. The economic indicators were highly correlated during the period 1950 to 1978. But after 1978, the two indicators provided different indication since they moved apart as the social and the environmental cost covered the benefits of increasing GDP. It is observed from the above figure that the level of satisfaction is highly correlated with the GPI per capita but it is not correlated with the GDP Per capita. The governments of some countries are considering these indicators seriously. Two states of United States such as Maryland and Vermont have adopted the economic indicator GPI as a measure of progress for the last three years and have implemented the policies with the purpose of improving it. Comparison of Gross Domestic product and Human Development Index Using the expenditure approach, the GDP of the country or the nation is measured by taking into consideration the level of consumption, government spending and gross investment. It can be represented with the help of the following equation GDP = C + I+ G+ (X – M) Where, C stands for consumption, I for investment, G represents government spending and (X- M) signifies export minus import.3 Many countries use GDP as an economic indicator for measuring the growth and progress of the economy. The economist, policy makers, media and the international development agencies use this indicator as the economic health of the country or the nation. The benefits provided by GDP are it is frequently used and the data required for its implementation are readily available. But GDP is criticized by some of the economist of the world since it fails to take into consideration some of the important indicators reflecting the growth and development of the economy which includes the human well being such as educational attainment and the life expectancy. Therefore in order to overcome the limitations another alternative measure was developed which is known as Human Development Index. This indicator was introduced by Amartya Sen .The main indicators used by this index mainly includes the adult literacy rate, life expectancy and the GDP per capita. It takes into account the GDP and various other factors required for human development such as longevity, knowledge and decent standard of living. Since HDI is considered more comprehensive as compared to the GDP, therefore the countries that were rated or ranked high by GDP were termed lower by HDI. According to HDI, US is ranked as number 10, Germany is number 20, Japan is ranked number 11 and China as no 85. HDI includes various indicators which facilitate it in depicting better picture of the well being of the state and the Country as compared to the GDP. Apart from the benefits or the advantages provided by HDI, it also encounters criticism in its approach. The economist suggested that it is very difficult to identify and evaluate the economic growth and development of the country using HDI. It does not consider the spiritual and moral aspects associated with the human development. For example HDI does not take into consideration or punishes the countries with increasing suicide rates. Conclusion The above discussion indicates that increasing GDP is considered as an important objective of the economic policy of the nation but it cannot be considered as the ultimate objective because it has to consider various other indicators for determining the growth and development of the economy. There are various advantages or benefits provided by using GDP as an indicator in determining the health or performance of the nation. It includes the balance of payment, employment and unemployment rate of the country but it fails to consider some of the important factors. Therefore it is criticized by the economist or the policy makers. In the recent years the economist introduced different indicators for overcoming the limitations or the drawbacks of the Gross Domestic product. The Gross Progress Indicator and the Human Development Index is compared along with the Gross Domestic Product. The economist viewed and stated that the Human Development Index also possess some drawbacks as it is very complex and difficult to be implemented in the real world. The topic emphasizes on the fact that whether raising GDP is considered as the primary objective of the economic policy. Therefore on the basis of the above analysis it can be concluded that it cannot be considered as the primary objective since there are various other factors which requires consideration, it can be regarded as one of the important or primary objective of economic policy for identifying the growth and development of the particular nation or the country. References Brezina, Corona. Understanding the Gross Domestic Product and the Gross National Product. New York: The Rosen Publishing Group. 2011. Faal, Ebrima. GDP Growth, Potential Output, and Output Gaps in Mexico. Mexico: International Monetary Fund. 2005. Lochner, Martin. Are GDP/GNP appropriate measures of development? New York: GRIN Verlag. 2008. 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