National Welfare and GDP

According to Kubiszewski et al. (2013), the formation or construction of efficient indicators of social well-being of individuals in a given state is not only important for economists, but it is also a concern and a heated topic in public debate for governments and politicians. Over the last few decades, there has been a surge of initiatives and the establishment of several alternative indicators from various organizations and agencies such as the United Nations, the European Union, and the Organization for Economic Cooperation and Development, among others, to identify the social welfare of individuals globally and in specific states. Apparently, the welfare economist and agencies have flourished in different directions by involving various concepts such as the theory of fair allocation, theory of social choice, the study of happiness and its determinants, the capability approach, in conjunction with the new developments in the psychology of well-being and the philosophy of social justice. These conceptual developments give appropriate new analytical tools for a concrete measure of people’s happiness and welfare.

However, about two decades ago, people have significantly relied on the Gross Domestic Product as the aggregate measure of the economic growth of a given state, together with the national well-being of persons in those countries. Therefore, the purpose of this study is to discuss one of the approaches to the measure of social well-being/welfare, that is the gross domestic product, the different advantages associated with the method, its drawbacks, alternative procedures, and a conclusion based on the discussion.

Gross Domestic Product (GDP)

As affirmed by Tideman, Frijters, & Shields (2008), the term Gross Domestic Product also abbreviated as GDP refers to an economic indicator/measure of the country’s total income and the output, for a specified period, usually one year. Different agencies and economists use GDP to measure the relative wealth of a given state together with its overall economic growth or decline. Apparently, Gross Domestic Product acts as the aggregate gauge of the nation’s economic activities. Individuals use GDP as the measure of social welfare because it tends to relate to the consumers’ consumption, mainly used as the proxy for welfare. It tries to incorporate the final commodities (goods and services) produced within a state; hence, providing the final monetary value of every commodity produced in a country. Economists use three distinct techniques to account for a nation’s GDP; that is, expenditure approach, income approach, and product/output approach (Proto & Rustichini, 2013).

The computation of expenditure approach is by summing up all the expenses made on the final goods and services produced by a nation. Expenditure method incorporates four main components; consumption by the households (C), investment from business (I), spending from the government (G), and net export, which is the total exports, subtract the imports (Xn) {GDP= C+ I+ G+ Xn}. The other method as affirmed by Frey & Stutzer (2010) is income approach, which is the sum of all the final commodities produced by the use of factors of production. That is, by summing up all the factors of payment (GDP= Total national income + sales tax + depreciation + net foreign factor income). National income is equal to Labor Income (W) + Interest Income (I) + Rental Income (R) + Profits (PR). Finally, the output approach, which according to Proto & Rustichini (2013), focuses on finding out the nation’s total output by directly computing the overall monetary value of the total products produced in a nation (GDP= Country’s Output value for a particular period – the intermediate consumption).

However, there are different advantages and disadvantages associated with using the GDP approach as an indicator of the national welfare.

Advantages of Gross Domestic Product as a measure of National Well-being

Studies affirm that there is a direct connection between happiness and a higher GDP. Apparently, GDP constitutes of some variables that determine individuals living standards such as income (Fleurbaey, 2009). In fact, people with higher income affords better services and products such as proper hospitalisation and education, recreational services, expensive gadgets, among others. In one way or another, happiness can be monetarized because it is inclusive of various variables that require adequate financial strengths to secure them. Researchers claim that there exists a definite association/ link between the Gross Domestic Product and the life satisfaction, but after a certain bliss point, the effect disappears. It means that a reasonable GDP acts as the starting point or the baseline for social welfare, but as an individual climb the ladder of richness, the correlation diminishes (Fleurbaey, 2009). Therefore, to the developing individuals or countries, not forgetting that these nations are countless, using the GDP approach as the measure of the national well-being is significant and can determine the level of happiness of the people.

Another merit of using GDP as the measure of the national welfare is that among all the available alternative measures or indicators of the national well-being, GDP is the best approach. Consequently, various alternative measures of social wellbeing exist which defectors of GDP apply to determine the life satisfaction of individuals, and they include Human Development Index (DI)), Ecological Footprint (EF), Genuine Progress Indicators (GPI), among others (Proto & Rustichini, 2013). However, all these methods have more throwbacks compared to the GDP. For instance, Human Development Index (HDI) uses three dimensions of human development to measure the nation’s achievements, which include knowledge, a decent standard of living, and healthy life. Apparently, evaluating all these components affirm that they require financial capabilities from the households. Taking an example of accessing knowledge; this demands school enrollment, which needs finances from either the state government or the families. Again, good health is as a result of having access to well-equipped medical facilities, which unless covered by the government, they demand adequate resources from individuals. Therefore, these alternatives revolve around from the fundamental concept of the GDP.

Disadvantages of GDP as an Indicator of National Well-being

In its composition, GDP does not include any elements of national wellbeing. As discussed above, GDP incorporates the value of the finished good and service, produced in a state over a specified period. Among all the three techniques of computing the GDP none of them that include any significant indicator of the social welfare or happiness (Kubiszewski et al.,2013). However, this does not imply that the procedure cannot be a good indicator of the people’s living standards, but economists use the method as a proxy for the proxy to signify its validity. For example, the computation of the GDP does not account for leisure time, which is a significant determinant of the people’s welfare. In a typical situation, the GDP for the United States per capita is larger than that of Germany, but the living standards of the German residents are way better than that of the US. Consequently, the US workers work several hundred hours a year more than the regular German employee. While computing the GDP, the German government does not take into account their workers’ extra weeks of vocation.

Secondly, GDP only accounts for the market transactions. That is, GDP does not include/ consider the voluntary or domestic activities, even though these tasks bring about considerable effects on the social wellbeing, as they improve people’s standards of living by complimenting the market economy. As stated by Fleurbaey (2009), GDP tends to exclude most of the non-market activities that bring about social significance like the quality of education, the health of the children, the strength of the marriage, cost of depleting natural resources, among others. Nevertheless, GDP excludes illegal activities and black market transactions, which may have substantial adverse implications on the general social welfare of individuals. Again, the unrecorded cash transactions get omitted in GDP statistics, where most of them may even be legal, and the producers’ intention may be to evade taxes. In one way or another, these activities either negatively or positively affect the national welfare of the consumers; therefore, the economists of the GDP should derivate practical means to include all the transactions in a nation.

The third disadvantage with GDP as the measure of national welfare is that it does not describe the wealth distribution of the nationals. In most of the countries, there exists a higher wealth inequality, where many persons do not gain any benefit from an increased economic output/production. The reason behind this is that poor people have no purchasing power for most of the household goods and services. The gap between the haves and have not (poor and the rich) always widens, making some individuals live in absolute poverty, while others live in luxurious life. Therefore, in any circumstance of accurately describing the social welfare, it is critical to consider the wealth distribution between the individuals of a country.

Another demerit of using GDP is that it does not describe the products produced. Apparently, GDP measures the overall value of all the finished goods and services within a given economy, where it accounts for commodities that might have adverse implications on the social well-being (Victor, 2010). For instance, for those countries with stable firearms industries, they represent a significant portion of their GDP. However, some of these firearms may be sold and used within the nation itself, where they might negatively affect the overall social welfare of the citizens. The truth remains, most of the people will end up misusing the firearms, endangering the social wellbeing of other innocent persons. Therefore, the approach should have a distinct way of eliminating all the goods and services that may jeopardise the social welfare of others.

Gross domestic product ignores the externalities. Any economic growth of a state goes hand in hand with overutilisation of both non-renewable and renewable resources. Due to this exploitation of resources (for example overfishing, pollution), more and more negative externalities arise, which automatically lower the national well-being (Decancq & Schokkaert, 2016). Unfortunately, no inclusion of these adverse effects in the computation of the nation’s GDP. Furthermore, GDP can rise due to inefficiency because the approach does not distinguish between the nature and quality of the goods and services traded, as most of the customers may opt to buy multiple of low-quality products due to financial struggles, which in the end increases the amount spent. Nevertheless, the establishment of new commodities in the market replaces the older ones; therefore, the method doesn’t show the inclusion of the new products traded in the marketplace.

Alternatives for Measuring National Well-being

Human Development Index

According to Anderson (2014), Human Development Index (HDI) is the most efficient single matrix for the welfare and progress of an economy. The approach measures the country’s value and well-being in three dimensions, namely, education/knowledge, life expectancy (healthy and long life), and a decent living standard (determined by the GDP per capita). Apparently, the first two elements of Human Development Index (education and health) focuses on precise societal goals, but the gross domestic product variables remain a significance proxy for national well-being. The method has been in use by most of the agencies like the United Nations Development Programme (UNDP) since 1990 for their human development report (Anderson, 2014). Again, HDI is used by the European Nations to compare different nations and regions.

Better Life Index

The index enhances the comparison of the national welfare across nations, deriving its basis from eleven vital aspects which determines and shape the human’s lives and well-being. The primary elements include education, housing, jobs, income, health, environment, civic engagement among others. Nevertheless, each facet gets its evaluation based on four statistical determinants that are assigned equal weights; for instance, education/knowledge score is based equally on attained levels of education and standard reading skills. The ratings for each facet can be combined into a monetised overall value, but the default thing is to treat every aspect equally (Anderson, 2014). The users of the approach can derive or issue greater significance to particular dimensions to come up with their overall country ranking and value. However, the available data for this approach starts with that of 2011; therefore, the method needs several years to determine the overall social progress of the individuals.

Genuine Progress Indicator

This method was developed by John Cobb and Herman Daly in late the 1980s, like a refined version of ISEW (Index of Sustainable Economic Welfare). The technique makes use of the same personal consumption data as that of the gross domestic product, but then, makes some critical distinctions in the process. GPI adjusts some factors like income distribution among the individuals, where it incorporates other elements such as volunteer work, the value of the household, and subtract other externalities such as the cost of pollution and crime.

Ecological Footprint

As Kubiszewski et al. (2013) state, Ecological Footprint (EF), measures the entire demand and supply of nature. That is, it estimates on how much water and land area a human population needs to produce particular products for consumption, at the same time, how these natural resources absorb its wastes under the efficient technology. Apparently, on the side of demand, the method measures the ecological aspect that a particular population needs to produce based on the resources (natural) it consumes where it includes fibre products, fish, livestock, timber, forest products, plant-based food, and space for infrastructure mostly in urban areas. Nevertheless, the environmental assets are required to absorb the waste products, more so the carbon emissions (Kubiszewski et al.,2013).

Happy Planet Index

The last applicable method when measuring the national well-being of the economy is Happy Planet Index. The technique measures the ecological efficiency with which the economists derive the human happiness and welfare. The users of the procedure multiply the indices of life satisfaction estimated through the integration of responses from the international surveys and the life expectancy of the persons, then divide the results with the ecological footprint to come up with HPI. Apparently, economies get a higher HPI score when they attain a significant level of health and satisfaction at the same time, impacting environmental resources lightly.

Conclusion

As affirmed by Fleurbaey (2009), the use of the gross domestic product by different agencies can be essential in giving out a general overview of a nation’s economic status; however, when measuring the national social well-being of an economy, the approach fails to be an efficient indicator. Apparently, GDP only involves variables that can be measured in monetary terms, where it fails to include some factors such as happiness, leisure, good health, among others, which directly attribute to the individuals living standards. As a result, the economists have identified several other techniques when identifying the national welfare of an economy such Goss National Happiness (GNH), Human Development Index (HDI), or Genuine Progress Indicator, which are more efficient and practical. Consequently, the primary concern with attempting to measure a level of happiness/welfare within a nation is that some critical factors in a life of a human being are difficult to monetise or quantify. In fact, one of the concepts known as the Easterlin paradox affirms that an average happiness has remained unchanged despite the sharp increase in GDP, and GNP per head in different economies (Clark, Frijters and Shields, 2008). Therefore, the reliance of GDP as an indicator of the growth of an economy and the living standards of the individuals is becoming an outdated concept paving in the use of other more definite approaches.

References

Anderson, V. (2014). ALTERNATIVE ECONOMIC INDICATORS (ROUTLEDGE REVIVALS). Routledge.

Tideman, S., Frijters, P., & Shields, M. A. (2008). Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. JOURNAL OF ECONOMIC LITERATURE, 46(1), 95-144.

Decancq, K., & Schokkaert, E. (2016). Beyond GDP: Using equivalent incomes to measure well-being in Europe. SOCIAL INDICATORS RESEARCH, 126(1), 21-55.

Fleurbaey, M. (2009) “Beyond GDP: The Quest for a Measure re of Social Welfare”, Journal of Economic Literature 47(4), pp 1029 - 1075

Frey, B. S., & Stutzer, A. (2010). HAPPINESS AND ECONOMICS: HOW THE ECONOMY AND INSTITUTIONS AFFECT HUMAN WELL-BEING. Princeton University Press.

Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T., & Aylmer, C. (2013). Beyond GDP: Measuring and achieving global genuine progress. ECOLOGICAL ECONOMICS, 93, 57-68.

Proto, E., & Rustichini, A. (2013). A reassessment of the relationship between GDP and life satisfaction. PLOS ONE, 8(11), e79358.

Stiglitz, J. E. (2009) ”GDP Fetishism”, THE ECONOMISTS’ VOICE 6(8), pp 1 - 3

Victor, P. (2010). Questioning economic growth. NATURE, 468(7322), 370-371.