Indian Institute Of Management Tiruchirappalli

GDP- Irrelevant measure of Prosperity

Macro Economics
Renuka S 1101085

GDP - irrelevant measure of a Nations Prosperity

Gross Domestic Product is defined as total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. It is one the primary indicators used to gauge the health of a country's economy Economy being a faulty measure of progress "To use economic measurements alone to gauge the success of a nation would be equivalent to assessing the entire condition of a man simply by looking at his bank balance," writes Peter Mandelson, former U.K. economic minister. The economy is not a true measure of countrys prosperity. This fact is established in the following tables taken from www.prosperity.com. The nations ranking in overall metrics is different from their rankings in economy metric.

Major Shortfalls in GDP GDP measures the aggregate market performance of the nation but not the welfare of the country. GDP is the measure of economic activity of the nation. Economic activity implies the distribution and use of resources and not the actual welfare of the people. There are various disadvantages of GDP which are enumerated below It cannot distinguish between economic activity which causes benefit and that which causes harm. All economic activity whether it produces bombs, cigarettes or oil spills or even child labor and sex trade are counted as growth

Because it measures only money transactions, it does not count most of the work done by women, including child rearing, household work, and growing food for the family. It does not count voluntary work, including care for the sick and elderly, literacy programs, charitable activities, all forms of batter, sharing, and non-monetary exchange Short term gains from overfishing, clear cutting of forests and depleting our natural resource base is measured as growth. But long-term costs incurred due to such activities are ignored and even passed on to the next generation. Cigarette sales are considered as positive growth, long-term health costs for increased incidents of lung cancer are ignored. Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy

Other places where GDP falters Asynchrony between Income Distribution and GDP By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all. This can be further emphasized by the IMF report on the top ten countries based on GNI and GDP. There exist major disparities between the two lists as shown below,

GDP does not accurately measure the welfare of the citizens in the country The spending on Healthcare increases the GDP of the nation and shows the nation to be more prosperous, it can be contradicted with the following example

In US the spending on the Healthcare industry is nearly 17% of their GDP, whereas in France, the total health expenditures as a percentage of GDP are only 10 percent. Yet, the life expectancy at birth in US is 78.3 whereas in France it is 80.7. France is obviously more prosperous in terms of nation welfare in terms of health when compared to US and this shows how faulty GDP is in measuring the welfare of the people in a Nation. Conclusion In order to overcome the shortfalls of GDP as a measure of a Nations welfare esteemed economists like Amartya Sen, William Nordhaus and James Tobin came up with various other indices like Genuine Progress Indicator(GPI), Human Development Index(HDI) which comprises of relevant indicators of social and economical progress. Though they are still not put in use, there is a good chance that one such index will soon be put in place. References http://www.investorwords.com/2153/GDP.html#ixzz1asTbl5QQ http://dieoff.org/page11.htm http://www.consumer.org.my/index.php/development/socio-economic/289-gdp-not-an-accuratemeasure-of-prosperityworld income distribution http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy http://data.worldbank.org/data-catalog/GNI-per-capita-Atlas-and-PPP-table http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita http://www.eastonbh.ac.nz/?p=572