Gross Domestic Product - Essay Example

Gross Domestic Product Introduction It is not the first time Gross Domestic Product (GDP) is at the verge of criticism as faulty indicator of social welfare or progress. Repeatedly scholars and economists have raised eyebrows and cautioned against the use of GDP, as a measure of factors was not originally intended for in its formulation. Consequently, it has deemed it necessary for new critics to shed light on the issue to question the extent to which GDP is effective as an indicator of progress. This volume intends to employ academic intellect and respectable economists’ ideologies to analyse critically if GDP is a reliable indicator of social welfare and growth in developing countries. Analysis The results and data concerning the growth of GDP come along with major influences on decisions made by both private and public policy makers and economists. GDP is based on survey and approximations of data collected over specified a duration (Ang et al. 2006). Quarterly and annual GDP approximates are extrapolated from economic survey and census data recorded from economic sectors like manufacture shipments, housing rates and retail sales. GDP is a measure of flow of services and goods produced within the economy market; these are products and services traded for cash. Although some non-market products are included in the data used to compute the GDP, numerous vital bits of data undergo omission from the census data used to compute GDP. Some of the vital information data include countries expenses in bettering healthcare, expenses of combating rising crime and emergency housing due to unforeseen occurrences among others. Such omissions weaken the reliability of GDP as an indicator of progress (Islam & Clarke 2002). Information and expectations about the growth of gross development product come along with great influence notably echoed by numerous influential and interest groups. Developing countries tend to lay too much trust in the results of GDP as a reflector of their economic and social well fare (Kubiszewski et al. 2013). Since 1960, scores of scholars have expressed negative sentiments on the use of interpretations computed from calculation of GDP as a proxy of social wellbeing. Since the creation of GDP, respectable economists have stressed that GDP is a measure of the activity of the economy and not the economy’s wellbeing. Scholars have further cautioned against the equation of GDP with social wellbeing and economy growth. Putting the counsel of respected economist to play, it is imperative that developing countries should only employ the GDP as a measure to answer diverse questions quoting fundamental issues (Herndon et al. 2014). Such questions includes the percentage increase in the general production due to inflation, what is the spending pattern on services and goods and how much income is saved or invested as opposed to that which is consumed (Rights & Liberties 2007). One of the issues that make the GDP fall short of a reliable and useful tool to measure social well fare is that its calculation and use as tool to measure progress is inconsistent with a number of principles. The first principle that GDP is inconsistent with is that it fails to divide clearly costs and benefits (Nørgård 2006). The second inconsistence with GDP is that it fails to correct changes in supplies and stocks, and the third one is failure to use accurate measures for all social expenses. If a company was to use the methods of calculation and computation like the one GDP is based upon, the organizations’ accounts would not get legal approval. This case applies in the same way to developing countries which use GDP as a means to measure their social well fare, in light to the inconsistencies noted to come along with GDP computation, it only show that GDP is not the best indicator for their case to predict social welfare (Brinkman & Brinkman 2011). Furthermore, it is worth noting that developing countries employ the used and data predictions of GDP in full knowledge of the flaws within the system of indication. Financial firms in developing countries use separate accounts for costs (outlays) and benefits (revenues). When calculating the GDP it adds the overall costs and benefits together (Costanza et al. 2009). Counsel from a learned economist suggests that any company or production line that would function as such would go bankrupt. However, developing nations face yet another type of environment that is more competitive than a firm is and thus eventually get a more distorted picture from the GDP. Moreover, developing countries further distort the eventual picture relayed by the GDP when they like the rest of the world fail to take into account decline in stocks that is chief to the representation of welfare or value, for instance natural gas in earth. The indicator further fails when it covers the expenses of provision of particular public services or goods such as the cost of defence in developing countries (Talberth & Bohara 2006). This is despite the fact that is lies with logic that the costs of public services and goods cannot serve as a complete measure of the benefits that come along with this services or goods. Based on the different forms of market failure many private services and goods show diverging social and private costs, GDP fails as reliable indicator. This is with the inclusion of some markets flaws including competition that is imperfect, technical–physical externalities, and price agreements. Scholars and economist stress that GDP must at all times be considered as an approximate of the total expense of all economic activities related to the market in any country. The particular benefits or real positive social implications are not seen, that is they are not measurable by the current developing countries means of GDP computation. As a consequent implication, the values of GDP growth should not be considered as indicators of social progress in developing countries but only as a valid reflection of increasing expenses of economic change, be it decline or progress. The inconveniences that result in the wrong use and implementation of GDP explains the scenario where welfare growth does not necessary coincide in developing countries. In certain occasions, its growth creates fewer benefits than costs such that a view of the optimal scale of the activity surpasses the economy (Costanza 2014). The economists in developing countries are pleased to argue in favour of the analysis of cost benefits as a general means for policy support and evaluation, however when the question of the direction in which the economy is taking route arises, many of these intellects are only satisfied with costs information only, that is the Gross domestic product. This turn of events point to a certain state where economists in developing countries are aware that of there are flaws in the GDP that makes it less competent as a valid measure of social well fare but at certain occasions just ignore this fact (Kubiszewski et al. 2013). Developing countries make corrections of GDP in occurrences of inflation to make approximations comparable with respect to time in the general country’s’ economy. This consequently results to a certain problem as the correction is practically based on the country’s’ consumption basket which is taken as a representative for the entire populace of the particular country. Concisely, the more twisted the distribution is, the more diverse the nation is in terms of their consumption behaviour and consequently the more inaccurate the survey and census data collected to compute GDP is. This scenario points to a state where the GDP will be of very little representation of the actual state of social well fare (Eurostat 2014). Another factor that contributes to GDP not being a valid indicator of social welfare progress is the fact that Macroeconomics within its economic growth theory does not give any support for a case where GDP can or will ever serve as a reliable measure of social welfare. IN essence, logic has it that rejection of GDP, as an indicator does not entirely mean the growth is not valid in general. In should be taken into consideration that ,in as much as an inter-temporal welfare function is usually given as a fact in the theoretical growth of the economy analysis, it suffers from lack of any basis in empirical studies (Jones & Klenow 2010). Developing countries economists may at one time assume that people take future well fare effects that are expected. For instance, people may respond to future uncertainties by amercing sufficient reserves of wealth. Essentially, this is different from assuming that people maximize particular inter-temporal welfare function, in many cases utilitarian welfare, which is defined as aggregation of a future stream that is discounted of monetary and instantaneous utilities. The general belief or factor that GDP has in particular occasions and countries correlated positively with the social welfare and progress should not lead economists in developing countries astray. It should never be confused that GDP is a proper measure of social progress. The correlations that have been recorded previously could be negative or even low in certain regions and periods and thus not stand up to the task of being used as a reference by developing nations. In the case of an experiment, if economists extrapolated a real GDP constant tempo growth towards a time period of the distant future, they would obtain an incredibly high GDP .At certain time and point it would be imperative to delink the two factors (Talberth & Bohara 2006). However. it would be very unrealistic for economists in developing countries to suggest that social wellbeing will at a certain time period reach comparably high levels if they remain of the ground that GDP is a reliable indicator of progress. It is worth noting that that in actual sense that the GDP cannot serve as a precise indicator or even a rough approximate of social welfare. In is quite possible that some developed nations have already de-linked GDP with as the measure for social welfare. Until some practical implementation of the issue is done, one cannot obtain a clear picture of the actual state of affairs based on pure theoretical reasoning and analysis (Bergh 2009). This implies that developing countries should work towards devising new means and systems to indicate all their performance and progress of their various aspects relevant to their economy, for this case they should improvise new indicators to measure social welfare and progress. Another case scenario where the GDP fails as an indicator in developing courtiers in where the politicians in power get very worried in events where low GDP growth is recorded. They particularly fear negative responses from voters as there is a generally assumption that the reflected slow growth will consequently lead to raised tax duties; lead to recession and to unemployment (Fleurbaey 2009) Nevertheless, the use and continued reliance on the information acquired from the equation of slow growth to little or no social progress is quite not in order. No single study in the past has linked the two issues and thus there remains no reason to worry that with slow GPD economies would end up in crisis. Therefore, in light to the technicality that the GDP works with, it is not in order for developing countries to continue employing GDP as an indicator of progress and social welfare as it gives an incomplete picture of the issue in question. The fact that income distribution which is relative to rivalry and welfare considers the implicit treatment of the income distribution as the chief object against the use of GDP as an indicator of social welfare is enough to show that developing countries should not employ GDP as an indicator for progress. This is so because gross domestic product only emphasizes on the average income. A case of unequal distribution ultimately implies unequal opportunities for individual progress (Kubiszewski et al. 2013). There would be scores of irregularities and inconveniences if the developing countries entirely used the GDP as a measure for social progress as it does not clearly distinguish between the expenses of the poor on the purchase of basic goods and on their expenses on the wealthy luxury (OECD 2013). Fig. 1: Relationship between social and human capital, produced and natural capital in developing nations Fig. 2: Relationship between population happiness versus GDP Fig. 3: Ideal components in economy evaluation Conclusion The GDP per capita carries along large influences on the decisions made by countries policy makers. These policy makers may be public and private economic agents. As seen from the discussion, herein the GPD is very far from being a precise or even a rough estimate indicator of the social well fare and progress of developing countries. From the issue discussed it can be concluded that, the use of GDP should therefore be constrained within the limits of testing the economic growth and other relative aspects in developing nations and not as an indicator of the social welfare in the particular countries. It is therefore rational and in order for economists in developing countries to dismiss the use of GPD as an pointer to monitor social progress and as a guide for making policies relevant to social welfare and progress. Reference list Ang, A., Piazzesi, M. & Wei, M., 2006. What does the yield curve tell us about GDP growth? In Journal of Econometrics. pp. 359–403. Bergh, J.C.J.M. van den, 2009. The GDP paradox. Journal of Economic Psychology, 30, pp.117–135. Brinkman, R.L. & Brinkman, J.E., 2011. GDP as a Measure of Progress and Human Development: A Process of Conceptual Evolution. Journal of Economic Issues, 0, pp.447–456. Costanza, R. et al., 2009. Beyond GDP: The need for new measures of progress. The pardee papers, p.39. Costanza, R., 2014. Time to leave GDP behind. Nature, 505, pp.283–285. Eurostat, 2014. GDP per capita in PPS. 26/03/2014, 42, pp.113–114. Fleurbaey, M., 2009. Beyond GDP: The Quest for a Measure of Social Welfare. Journal of Economic Literature, 47, pp.1029–1075. Herndon, T., Ash, M. & Pollin, R., 2014. Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge Journal of Economics, 38, pp.257–279. Islam, S.M.N. & Clarke, M., 2002. The relationship between economic development and social welfare: A new adjusted GDP measure of welfare. Social Indicators Research, 57, pp.201–228. Jones, C.I. & Klenow, P.J., 2010. Beyond GDP? Welfare across Countries and Time. Human Development, p.55. Kubiszewski, I. et al., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, pp.57–68. Nørgård, J.S., 2006. Consumer efficiency in conflict with GDP growth. Ecological Economics, 57, pp.15–29. OECD, 2013. GDP per capita. In National Accounts at a Glance 2013. Rights, P. & Liberties, C., 2007. Real GDP Growth. Democratization, pp.98–99. Talberth, J. & Bohara, A.K., 2006. Economic openness and green GDP. Ecological Economics, 58, pp.743–758. Read More