Can we say that GDP is an Accurate Measure of Human Wellbeing and Development?

Since the 1930s, a measure of the Gross Domestic Product has been used to determine the general health of any country (GDP). According to Yamarone (2012), a nation's GDP is the sum of all the commodities produced and the services rendered within its borders within a given year. Since the GDP is divided by the population of the country in question, the GDP per capita is a more accurate indicator of the country's prosperity. However, the GDP per capita model of determining a nation’s economic performance and social progress is flawed, according to a group of economists. The GDP has been criticised as being narrow and limiting in many ways. This paper analyses the limitations and weaknesses presented by the GDP per capita as a measurement of the general health of a nation and suggests alternative models that can be adopted in the UK.

GDP as a Measure for Progress and Well-Being in the UK

GDP measures the economic performance of any nation through the valuation of goods produced and services provided in absolute monetary terms. The GDP measurement relies on market production to determine the performance of the economy (Stiglitz, Sen and Fitoussi 2010). For this reason, the GDP does not capture very relevant information which go into the determination of the overall welfare of the UK people. For instance, the GDP needs the prices of all the goods and services within the economy for accurate calculations. Some of these prices, for instance those of healthcare services provided by the government, do not exist. Furthermore, the environmental degradation that is as a result of the production of these goods and the provision of the services is not considered in GDP calculation.

GDP measurement is highly dependent on the circular flow of income model. In the circular flow, the households provide the factors of production (inputs) like labor and capital (Leontief 1991). In return, the households receive goods and services as well as wages from the firms. Both the firms and the households in the process are exposed to income that they may spent on the capital investments, hence the circular flow. Furthermore, government policies play a part in this model as some of the income that the firms and households receive is subject to taxation, which becomes a form of income for the government to spend. At any point within the circular flow, the model yields a value Y, determined to be the sum of final goods and services in any economy. This is otherwise known as the GDP.

Households

Firms

Resources

Income, Y

Output

Expenditure, E

Financial Sector

Government Sector

Overseas Sector

Leakages

Injections

Figure 1 The Circular Flow of Income Model For Calculating GDP (Sloman, John, and Dean Garratt 2010)

From the above diagram of the circular flow of income, the GDP(Y) = Consumption + Investment +Government Spending + (Exports - Imports).

UK's Economic Growth Compared to Other Developed Nations

The use of GDP as an indicator of human development has particular limitations, especially for developed economies such as the UK. Some of these limitations are described below, according to Ivković (2016).

Non-Monetary Activities

The GDP per capita determination of economic performance by the UK does not take into consideration non-monetary activities that may affect the wellbeing of the people. For instance, issues on environmental degradation and pollution of the environment highly affect the wellbeing of present and future generations. Therefore, for two economies with the same GDP but one economy with highly a polluted environment, definitely the people in the less polluted environment enjoy a better lifestyle. Therefore, in determining the wellbeing of the people in the UK as compared to other developed nations, it is imperative to include non-monetary activities such as environmental pollution.

Inequality

The calculation of GDP does not include some common factors such as inequality. For instance, the average employee in the UK works for 48 hours per week. In another developed country where the average working hours per week is about 40, GDP calculations would not decipher the difference in these economies. If the GDP of the UK and that of a nation whereby the normal working hours are 40 per week, the latter would have a healthier population generally, even though GDP calculations may indicate a similar GDP per capita.

Access to Health, Education and Housing

GDP calculations rely on explicit numerical monetary values. For services whose prices cannot be explicitly quantified, therefore, GDP calculations would be erroneous. Education in the UK is mainly free or highly subsidized. In addition, the government provides healthcare and insurance services for its citizens almost at no cost. It would be difficult, therefore, for the households to quantify how much the government is spending on their behalf for the provision of these services. The GDP of the UK, therefore, may indicate that the nation is not fairing on well whereas it actually is. If the amount of support that the government is providing could be accurately quantified, therefore, the people’s welfare would be better than the GDP per capita depicts.

Income Distribution

The GDP per capita represents how much value of goods and services each person in the UK spends based on the population. Therefore, this theory assumes that the distribution of wealth is uniform across the region. However, the reality is much different and much of the wealth is in the hands of a small proportion of the population. Dividing the Gross Domestic Product with the population would, therefore, depict the wrong image on the ground. As most of the wealth is in the possession of just a few of the UK citizens, the GDP per capita that is depicted is way higher than the actual reflection on the ground (Burd-Sharps, Lewis, Guyer, and Lechterman 2010).

An Alternative Approach to Measuring Progress and Well-Being

As the GDP per capita model has been determined as flawed, there is a need for the adoption of a more accurate determination of the people’s wellbeing in the UK. One such a model would be the Index of Sustainable Economic Welfare (ISEW). This type of measurement takes into account the issues discussed above among many others. ISEW takes into account issues which would otherwise have had a zero value in the GDP model. For instance, the impact of technology in the lives of the UK people will be included in this model. In addition, some other factors that are included in this framework are public non-defensive expenditures, capital formation, and services from domestic labor and volunteering programs. Furthermore, ISEW puts the cost of environmental degradation into perspective in the determination of social and economic wellbeing.

In addition, the ISEW adjusts for factors such as income distribution. With an in-depth investigation into the distribution of income in the UK, the ISEW would be able to take care of this issue and come up with a more accurate measure of the general health and wellbeing of the entire population.

Other measures which have been suggested to replace GDP include Genuine Progress Indicator, Happy Planet Index, Gross National Happiness, as well as National Well-Being Accounts. Most of these theories have not been perfected but at least, they tackle some of the issues presented by the GDP per capita measurement.

Conclusion

The aim of this paper was an investigation into the accuracy of the measurement of human well-being in the UK using GDP. It has been determined that the concept of determining the well-being of the people using GDP is flawed. Mainly, some of the limitations to GDP include the lack of the inclusion of non-monetary services, uneven income and wealth distribution, inequality in terms of the amount of work-life balance that employees in any economy are facing among others. It has been determined that the GDP model needs to be replaced by a more inclusive and sustainable model. One such model would be the Index of Sustainable Economic Welfare.

References

Burd-Sharps, S., Lewis, K., Guyer, P. and Lechterman, T., 2010. Twenty years of human development in six affluent countries: Australia, Canada, Japan, New Zealand, the United Kingdom, and the United States (No. HDRP-2010-27). Human Development Report Office (HDRO), United Nations Development Programme (UNDP).

Ivković, A.F., 2016. LIMITATIONS OF THE GDP AS A MEASURE OF PROGRESS AND WELL-BEING. Ekonomski vjesnik/Econviews-Review of Contemporary Business, Entrepreneurship and Economic Issues, 29(1), pp.257-272.

Leontief, W., 1991. The economy as a circular flow. Structural change and economic dynamics, 2(1), pp.181-212.

Sloman, John, and Dean Garratt. Essentials of economics. Pearson Education, 2010.

Stiglitz, J.E., Sen, A. and Fitoussi, J.P., 2010. Report by the commission on the measurement of economic performance and social progress. Paris: Commission on the Measurement of Economic Performance and Social Progress.

Yamarone, R., 2012. Gross Domestic Product. The Trader's Guide to Key Economic Indicators, Third Edition, pp.11-46.