Alternative to GDP

Topic: “There is rising criticism of the widespread use of GDP as an indicator of the health of an economy. In fact, some experts are of the opinion that GDP growth is making the society poorer. Critically analyse this opinion in view of the concept of sustainability and also discuss some alternate measures being suggested and their implications to the businesses? ” GDP as an economic measure of the economic progress of a country Gross domestic product (GDP) is considered one of the most important factors that determine the economic activity and hence the progress of the development of a country.

It is the monetary value of all the final goods and services produced by a country in a specified time. Therefore, it is considered that if the country’s economic production increases, other factors remaining positive, then it positively benefits all the citizens of the country. It is hence used as an indicator for the country’s standard of living[1]. Therefore, greater the GDP, better the health of an economy and hence better the lives of the citizens.

Reasons for criticism on the use of GDP as an indicator of economic progress As GDP measures the monetary value of the final goods and services produced, it means that the money spent on the country’s well-being for example, millions spent on manufacturing fancy electronic gadgets, constructing a prison, cutting forests to use wood for production of further goods – are all considered at par while measuring the GDP. There is no emphasis on the quality of the output, the progress of the country in terms of the social state of affairs, human happiness, etc.

As these are essential ingredients in determining the health of an economy, the concept of using GDP as a measuring scale of the economic progress of a country if criticised. Disadvantages of GDP GDP is criticised on many aspects – it obscures growing inequality, aids depletion of resources and one of the most prominent criticisms is that it measures expenditure on education at par with expenditure on cigarettes i. e. it does not differentiate whether the spending that aids the GDP percentage is going towards a positive or negative cause. GDP does not measures the economic services that nature provides – for example, prevention of floods and landslides by existence of dense forests – it does not account for health, clean environment, etc. i. e. GDP falls short in taking into account equally important things that exist to make a country liveable by fostering social cohesion, along with just the monetary value of goods and services * GDP takes into account the government spending, but from where the funding is sourced and where it is utilized is not taken into account.

Hence, government borrowing is considered good for a country as far as GDP calculation is concerned * Money transactions that take place unofficially and go unrecorded are not accounted for in the calculation of GDP. Hence it does not help in avoiding taxes or prevention of illegal transactions and spending of such huge amount goes unnoticed * Harmful side effects like, pollution is not accounted for in the GDP.

No deductions are made from GDP for their harmful effects but addition to GDP is made by market transactions that aid in removing these harmful effects. Hence the calculation of GDP is not balanced * The GDP takes into account the goods and services produced but not exchanged for money. For example, volunteer work or and consuming it is not included in the GDP whereas expenditure on buying food from the market is taken into account [2].

Adverse effects of using GDP as a sole measure for economic success As GDP takes into account only some value created in the country and does not take into account several key transactions, GDP often increases at the expense of real growth and progress. The result is that GDP fails miserably as an indicator of economic success on the sustainability scale. The environmental and social aspects are not covered by the GDP. Alternative measures & their business implications There are several alternative indicators of the progress of a country.

These measure economic activity, environmental or social activities, well-being or changes in environmental, social or human capital. * Genuine Progress Indicator (GPI): It provides a complete picture of economical and social progress. There are several indicators used to calculate GPI that are broadly classified under three categories – economic, environmental and social. The economic category indicators are similar to gross product measurement. The environment factors measure cost of pollution, cost of change to natural resources, cost of climate change, etc.

The social indicator includes the value of education, lost leisure time, cost of crime, etc. This indicator has been adopted by the state of Maryland and is altered to include the impact of income inequality on the economy of the state. This indicator indicated the need to focus on reducing the level of income inequality in order to improve Maryland’s overall economic and social growth. Hence, this indicator has been successfully implemented that includes all the factors of well-being in a society.

This leads to modified business practices in order to reduce inequality and improve economic, environmental and social spheres of the state * Human Development Index (HDI): It is used by the UNDP to show how the improvement in economic growth and human development is improving conditions of the human in the various countries. The HDI is defined as process of widening choices available to humans in order to live an educated, long and healthy life and to have access to resources to have a healthy and decent standard of living.

It makes use of political freedom, human rights and self-respect to measure the index but as they are difficult to measure, the index uses longevity, knowledgeable and decent standards of livings as indicators in lieu of prosperous and long lives. * Gross National Happiness (GNH): It is frequently used as an alternative measure of progress. It was originally suggested by Bhutan to be used instead of using GDP as an appropriate measure of progress. It measures quality of life or social progress in consistency with Bhutan’s culture and spiritual values rather than focusing more on economic activity.

It measures seven types of wellness – economic, environmental, physical, mental, workplace, social and political. Several conferences have also been held on use of GNH and it was primarily used to base the progress of the country on reflections of the country’s Buddhist origins[3](Coztanza, Hart, Posner & Talberth, 2009). Conclusion There are several alternative measures that are suggested to be used to measure the progress and the social well-being of a country.

GDP is flawed such that it aids detrimental activities and does not take into account the positive activities of a country. Hence, an alternative that measures not only the market value of final goods and service but which also takes into account the social, economic and environmental factors while calculating the progress of a country is imperative to lead to sustainable development. The current use of GDP leads to more consumption of harmful cigarettes with no emphasis on the environmental degradation from the industrial and business rocesses. Hence, although the economy is progressing in certain spheres of economic activity, it is indeed lagging on sustainable development which requires pollution control, reduced resource usage, better social and income equality. Therefore, alternate measures that take into account all the factors that impact a nation should be developed and the alternative measure that is a composite of all the factors should be used to ensure sustainable development of the economy that reflects progress in daily lives of its citizens.

References:

1. http://www.investopedia.com/terms/g/gdp.asp
2. http://zorach.wordpress.com/2010/08/27/why-gdp-gross-domestic-product-is-a-poor-measure-of-wealth-and-prosperity/
3. (Coztanza, Hart, Posner & Talberth, 2009) – http://www.bu.edu/pardee/files/documents/PP-004-GDP.pdf