Gdp And Economic Welfare Essay

Gross Domestic Product (GDP) is the most important economic indicator and it is used for comparison purposes to see how countries are doing economic wise. It entails the aggregate production or output in a country. GDP can be measured using either the expenditure approach where all final expenditures are added or by the income approach where all compensations of employees and other forms of incomes are added up. GDP is used to measure an economy’s economic growth. Hartzenberg T et al (2005, 114). The real GDP can be used to establish how an economy is performing and hence compare various economies as one can compare their outputs. It is also important in the sense that it can be used for forecasting purposes and hence important in planning. This paper will distinguish the difference between economic growth which can be measured using GDP statistics and national welfare or people’s well being. According to McConnel and Brue in their distinguished book ‘Economics’, a country can be said to have economic growth when there is a positive increase in its GDP. Economic growth is different from economic welfare and economic development. Economic growth is characterized by an increment in natural resources, the quantity or quality for the human resources, as well as an improvement in technology that translates to increased productivity. Economic growth refers to a positive shift in the production possibility curve to the right or where economic efficiency is attained. McConnel and Brue (2005, 149). A country A could register a higher GDP than country B but this does not necessarily mean that country A is doing better in terms of economic welfare as there is a clear distinction between economic growth and national welfare. This can be blamed on the limitations attached or rather linked to GDP calculation and analysis. (facstaff. uww. edu). Walter in the book ‘Economics’, noted that GDP ignores or rather omits household production which is an important sector in as far as determining the welfare of people is concerned. Wessels W (2006, 75). Alan and Laurence backed this idea in their book ‘Macroeconomics an integrated approach’ where they argued that GDP does not account for the unreported incomes which are earned in the ‘underground economy’. A good illustration of unreported incomes is a situation where waiters fail to report all the tips they acquire while on duty. People may fail to report their actual incomes to evade taxes. Statistical problems could also have occurred creating the impression that country A had a higher GDP than country B though this may not be actually be the case. Some people may not divulge all the information regarding their incomes or expenditure leading to wrong GDP estimates. If country B has a very significant ‘underground economy’ then her citizens could be doing better than those in country A even though the latter had a lower GDP. This is an indication that high GDP rates do not necessarily translate to better welfare for the citizens. Auerbach and Kotlikoff (1998, 136). When calculating GDP the aspect of leisure is ignored although it is very critical in as far as defining people’s welfare is concerned. Country A could register a higher GDP than country B but the citizens in country A could have been overworked leading to health complications. In this case, the high GDP could be at the expense of the people’s health and we cannot conclude that it ensured their welfare or well being. Wessels W (2006, 75). Using GDP figures to determine the people’s welfare is inappropriate as it fails to include ecological costs incurred in the process of attaining the said GDP. Ecological costs include the costs of pollution. Country A could register a higher GDP than country B due to the fact that country A had better technology that ensured increased production. However, the increased production could have been realized in the face of increased air, water and land pollution all of which poses health hazards to the citizens. Wessels W (2006, 75). When such is the case then we cannot conclude that country B is doing better than country A. People’s well being encompasses the people’s health and not just their economic well being. A country with lower GDP but ensuring that her environment is safe for her citizens is doing well in terms of national welfare even though it could record a lower GDP than one with a higher GDP but has a polluted environment. GDP ignores a country’s environmental quality and it fails to account for the consequences that an economic growth could come along with. Auerbach and Kotlikoff (1998, 136). GDP also focuses on output or production although it is consumption that could best explain people’s welfare. For instance country A could sell more goods to other nations like country B since the demand for such goods in country B is higher. In this context, country B could be doing better than country A but since country A exports more it may create the impression that it is doing better. On the other hand, country B may register a lower GDP translating to being worse off as her net exports are negative but in the real sense they could be doing better. Focusing only on the output approach would lead to distortions while addressing the issue of national welfare. Another critical issue cited by Wessels as a limitation of using GDP to evaluate a country’s or nation’s well being is the fact that government spending is valued at cost rather than at its value. Government projects in country A could have been at a higher cost than those in country B but an important aspect to consider here is how much the projects were worth to the citizens. This is because some important projects could be undervalued while worthless projects are overvalued and this will have a significant impact in as far as influencing the people’s welfare or well being is concerned. Wessels (2006, 75). GDP calculation does not include the plight of the people in terms of health and life expectancy which are quite important in assessing the people’s well being or welfare. Country A could have a higher GDP than country B but if she has a lower life expectancy rate and is performing poorly in terms of general health of her citizens then we cannot argue that her citizens are better off than those of country B especially if in country B the life expectancy and general health is better. Health which is a very important factor in determining the people’s welfare when calculating a country’s GDP people’s conditions health wise are only included if they increase the costs of the health system. A country’s health costs could be attributed to modern and advanced health technologies but this does not guarantee a nations well being health wise as the costs incurred may not match the benefits attained. Democracy or political freedom is an important part in determining people’s welfare. Good governance is one where respective freedoms are respected and most importantly democracy embraced. Using GDP to evaluate people’s welfare is inappropriate as it does not provide any information regarding a country’s governance. Country A could register a higher GDP than country B but the political organization in country A could be oppressive to the citizens. In this context, we cannot argue that country A citizens are better than those in country B which could be exercising democracy and consequently not oppressing her citizens. (facstaff. uww. edu). Another vital issue in defining people’s well being is assessing social justice in a country. If country A registered a higher GDP but was very poor in terms of the civil justice system then we cannot conclude that her citizens well being was ensured. Country B citizens could be doing better at a lower GDP level if she ensured an effective social justice system. An effective system ensures that the rule of law is embraced and people’s rights respected. This is important in ensuring that corruption which threatens people’s welfare as it only benefits a segment of the total population is kept at bay. Using GDP to compare the well being of people in country A and B could give a wrong impression of what is actually the case. This is attributed to the fact that a country could have overly adjusted for inflation leading to the impression that increase in prices translate to hikes in prices even when this could be as a result of improvement in the products produced. Morse S (2004, 39). Another aspect that makes it inappropriate to compare country’s welfare using the GDP statistics is the fact that for such comparisons one must convert the currencies into the other country’s currency and when carrying out the conversions it is possible to understate a country’s GDP especially in the developing nations. A country A could register a higher GDP than country B due to errors arising from conversions of currencies. (facstaff. uww. edu). Country A could have a higher GDP than country B but her citizens could be worse off than those of country B in terms of national welfare. This is attributed to the fact that country A could be characterized by many social evils as opposed to country B. Failure to include the non-market production in the calculation of GDP makes it an inappropriate tool in determining people’s welfare in an economy. Such services like childcare, subsistence farming and care for the aged mean a lot in as far as people’s welfare is concerned. Country A could have a higher GDP but with a lower subsistence economy when compared to country B. A significant subsistence economy would ensure that a country’s food security is ensured and this would place her citizens at a better stance in as far as their well being or welfare is concerned. GDP fails to account for the effects or consequences of technology which has an impact in its determination. In contrast GDP is more concerned on the value of the end product without taking to concern the efficiency of the technologies in question. If country A registered a higher GDP than country B but country A’s government invested more in sectors like education and health ensuring that her citizens were better off in those areas then we can conclude that country B’s welfare is doing well even if it has a lower GDP than country A. Treating investment in education and health as consumption rather than investments makes it difficult to estimate people’s welfare. Willis I (1997, 164). Distribution of resources in a country is also a point to consider when using GDP figures to estimate people’s welfare. Country A could register a higher GDP than country B but this high GDP could have been arrived from a small insignificant proportion of the total population. This is to say that it is inappropriate to say that country A citizens are doing better than those in country B as the GDP is contributed by a small proportion while a large proportion of the society could be languishing in poverty. Income distribution is of much essence when determining people’s welfare in an economy. The inequality issue and GDP arise more so in developing countries or third world as opposed to developed ones. Willis I (1997, 164). Social issues like family stability are also not reflected when calculating GDP although it has an impact on people’s welfare or well being. GDP in country A could be higher than that in country B as more money is being channelled into paying divorce cases lawyers or building more police posts in response to increased crime rates. This illustrates that it is inappropriate to make conclusions about people’s welfare using GDP. In his book ‘The Japanese Economy’, Mitsuo Saito noted the inappropriateness of GDP as a tool of evaluating people’s well being due to the fact that it does not indicate the labour conditions, housing conditions, state of the social security or the urban life which are crucial in determining people’s well being. Saito M (2000, 13). Economic growth could be based on either the demand side or the supply side of an economy. The aggregate demand could increase due to an increment in the population size while aggregate supply could be due to the discovery of new natural resources. Aggregate output is affected by the level of labour supply, the stock of accumulated capital, level of technology as well as the institutions in place. There is an inverse relationship between prices levels and output and when prices levels fall the output increases. Tanzi and Chu (1998, 203). Monetary and fiscal policies in a given economy would affect the country’s well being or welfare. The people’s welfare will be affected by the policies that an economy embraces. Good policies are those that aim for equitable economic growth in a nation. They ensure that the poor in the society are not worse off but instead uplift them. This can be achieved through the application of equitable taxes such that people’s ability to pay is what determines the amount they are to pay all taxes. The rich will pay a higher amount than the poor in such cases. The government could also apply fiscal policies to ensure development for the poor in society. References: Alan J. Auerbach, Laurence J. Kotlikoff. 1998. Macroeconomics: An Integrated Approach. MIT Press. Bernard Baumohl. 2007. The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. Wharton School Publishing. Campbell R. McConnell, Stanley L. Brue. 2005. Economics: Principles, Problems, and Policies. McGraw-Hill Professional Publishers. Measuring GDP and economic growth. Retrieved on 23rd November 2008 from http://facstaff. uww. edu/ahmady/courses/econ202/ps/sg3. pdf Mitsuo Saito. 2000. The Japanese Economy. World Scientific Publishers. Ian Wills. 1997. Economics and the Environment: A Signaling and Incentives Approach Allen & Unwin Publishers. Stephen Morse. 2004. Indices and Indicators in Development: An Unhealthy Obsession with Numbers? Earthscan Publishers. T. Hartzenberg, Buck Standish, A. Wentzel, V. Tang, T. Hartzenberg, S. Richards. 2005.