“From GDP perspective nuclear warheads do just as well as hospital beds or apple pie”
The major flaws in the GDP are:
• GDP per capita hides big inequalities in income and wealth. Average income might be rising but inequality could grow at the same time.
• GDP does not differentiate between outputs that are detrimental and the outputs that are beneficial to human wellbeing.
• GDP could have increased due the increase in working hours which will have a consequence on the family life.
• GDP makes no allowance for depreciation of capital.
• GDP does not measure the life expectancy and the changes in people’s health.
• GDP does not include the value of non-marked output and unpaid work (Social output).
• GDP does not account for the impact of growth on the sustainable stock of natural resources (Environmental Cost).
• GDP doesn’t adjust for the distribution of goods.
• GDP does not take into account the amount of debt or the cost of servicing that debt.
• How to measure the utility and value of services that we consume digitally (Digital economy).
• GDP could encourage overinvestment and wasteful spending.
2. Among the notable alternative approaches are the Human Development Index, the Dashboard approach as pioneered by OECD countries and the Social Progress Index. Discuss briefly all the alternative approaches including the ones mentioned here and choose the one or create your own measure were you asked by the Government of a country to advise it on a suitable measure of economy.
The various alternatives to GDP are:
1. Human Development Index ( HDI):
It emphasize that not economic growth alone, but people and their capabilities should be the ultimate criteria for assessing the development of a country. HDI is a summary measure of average attainment in three key dimensions of human development. These dimensions are:
• a long and healthy life
• being knowledgeable
• Having a decent standard of living
The HDI is calculated as the geometric mean of normalized indices for each of the three dimensions. The health and education are assessed by life expectancy at birth and mean of years of schooling for adults aged 25 years and more and expected years of schooling for children of school entering age respectively. Gross national income per capita is used to measure the standard of living dimension is measured by. The HDI uses the logarithm of income, to contemplate the diminishing importance of income with increasing Gross National Income. Geometric mean is used to aggregate the scores for the three HDI dimension indices into a composite index. One of the benefits of the HDI’s relative simplicity is its use of credible quantitative data sources e.g. UNDESA data is used to measure life expectancy at birth.
2. OECD Better Life Index (BLI):
The BLI effectively accounts for the value of related government services. It focuses on outcome indicators related to education, housing, safety, and health. On environmental periphery, the metric comprises indicators for water and air pollution that reflect local pollution only and global environmental issues are neglected. The BLI is consciously malleable. Users can generate different results depending on the weights assigned to each category of wellbeing. Thus, it provides a ‘values’ perspective that can be adapted to the user’s own interests. The current BLI comprises 24 indicators across 11 themes.
The 11 themes are:
vii) Civic Engagement
ix) Life Satisfaction
xi) Work-Life Balance
3. Social Progress Index (SPI):
SPI aims to assess the capacity of a society to meet the basic human needs of citizens, establish building blocks that enhance and sustain quality of life of citizens and communities, and support conditions for populations to maximise their potential. The SPI comprises 53 indicators that measure factors across the three domains:
• Basic Human Needs
• Foundations of Wellbeing
These 53 indicators are selected based on the availability, internal validity and wide-coverage of the data. The SPI comprises both global and local indicators of environmental health, including wastewater treatment, biodiversity, air pollution and greenhouse gas emissions. The index inherently questions the economic focus of other metrics using its social and environmental framing, adopting a values perspective that brings in multiple aspects of an environmentally and socially prosperous society. The SPI comprises indicators that to a small extent account for overinvestment and wasteful spending, wealth and quality of services and products. These indicators cover corruption, educational institutions and human capital statistics, and mobile phone subscriptions and internet access respectively.
4. Happy Planet Index(HPI):
HPI measure the sustainable wellbeing of all the people. It represents a shift away from living standards based on material as the fundamental drivers of progress, in principle, indicating how efficiently residents of different countries are using environmental resources to lead long, happy lives. It combines a country’s life expectancy with experienced wellbeing, adjusted for inequality and divided by its ecological footprint.
5. Global Competitiveness Index (GCI):
The Global Competitiveness Survey is produced by the World Economic Forum (WEF) and is regarded as an insightful measure of national productivity. It combines 114 indicators that reflect 12 categories: institutions, infrastructure, financial market development, macroeconomic environment, health and primary education, labour market efficiency, technological readiness, higher education and training, goods market efficiency, market size, business sophistication and innovation. These in turn are organized into three subindices: basic requirements, efficiency enhancers, and innovation and sophistication factors. The data collected through the internationally distributed Executive Opinion Survey targeting the business community is used to populate majority of indicators. GCI is the only metric with a specific measure of wastefulness of government spending issue measured using the indicator ‘Wastefulness of government spending’ present within the GCI’s ‘Institutions’ category. The indicator: ‘Prevalence of foreign ownership’ in the ‘Competition’ category, if to a limited extent, makes GCI the only metric that accounts for international income transfers.
6. Genuine Progress Indicator (GPI):
The GPI indicator takes everything that GDP uses into account, factoring in other numbers that represent the cost of the negative effects related to economic activity. The GPI nets the negative and positive impacts of economic growth to examine whether or not it has benefited people overall. GPI most comprehensively measures national wealth, using indicators across built capital, human capital, social capital and natural capital. The GPI uses 12 indicators across three categories: market based wellbeing, non-market based wellbeing, and environmental and social costs.
Global Competitiveness Index should be considered as the measure of economy as it emphasises on all the aspects that impact the wellbeing of population, which is what matters in the lives of the people. It also considers both the negative and the positive impacts of various factors that contribute to the growth.