Using GDP/ GNI to measure economic well-being
A higher real GDP/ GNI per capita value usually corresponds to a higher standard of living, as the average person will be able to purchase more goods and services. However, there are several reasons why these values may not accurately measure economic well-being.
“The gross national product does not allow for the health of our children, the quality of their education, or the joy of their play.”
– Robert F. Kennedy
Why might increases in GDP not equate to a higher standard of living?
Real world example
Source: GDP per capita vs. economic inequality
Using examples from the source, discuss why real GDP per capita statistics may not accurately reflect the differences in standards of living between countries.
Real GDP per capita indicates the average level of national income received by each person in an economy. However, this value does not accurately reflect the economic well-being of individuals as income is not distributed equally amongst individuals in an economy, and different countries have differing levels of income inequality.
See Gini coefficient (later).
The real GDP per capita of South Africa and Ukraine are similar, which may suggest the living standards are comparable. However, Ukraine has the lowest Gini coefficient (low income inequality) while South Africa has the highest Gini coefficient (high income inequality).
https://en.wikipedia.org/wiki/List_of_countries_by_inequality-adjusted_income
Note how low USA is.
Using GDP/ GNI to measure economic well-being
Leisure time
Source: Annual working hours vs. GDP per capita
Take Hong Kong and Switzerland for example. The GDP per capita in these two countries are similar, which may suggest the living standards are comparable. However, the average person in Hong Kong works 596 hours more than the average worker in Switzerland in a year.
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| Working hours (hours per person) | GDP per capita (int.-$) |
Hong Kong | 2,186 | 56,055 |
Switzerland | 1,590 | 57,410 |
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Therefore, real GDP/ GNI values do not accurately measure economic well-being as important factors such as leisure time are unaccounted for.
GDP does not take into account Quality of Output
Output figures also tell us little about the quality of goods and services produced. This is best illustrated by the fact that a £1000 computer is more powerful than a £2000 computer that you purchased 5 years ago but statistics do not take this into account (improvements in goods and services- P 264)
Productive v unproductive output? GDP doesn’t differentiate between these
Using GDP/ GNI to measure economic well-being
Negative externalities
GDP and GNI statistics do not account for the negative externalities which arise with increased production in the economy. As a result, economic well-being may be overstated as environmental costs are not considered.
Green GDP is a measure of economic activity which
accounts for environmental degradation and the depletion
of natural resources.
Green GDP = GDP - environmental costs of production
Using GDP/ GNI to measure economic well-being- non class activity
Informal activities
GDP/ GNI statistics may be understated as they do not account for informal activities involving non-marketed goods and those in the hidden/ underground economy.
Answers may include:
The sale of goods and services in the underground economy are hard to track, but ‘reputable sources peg it up well into the trillions of dollars per year’. This is ‘bigger than the market for fast food, movies, fashion, and smartphones, combined many times over’. Therefore, GDP/ GNI figures may be understated as they do not account for transactions in the underground economy.
Black market=illegal
Informal can be legal but just not declared
Self Provided Goods- why they mean that GDP figures may be unreliable
Real world example – case study (HW)
Podcast: What Does GDP Not Tell Us? (15 mins ted talk)
Answers:
This is a problem because GDP does not tell us anything about the environment or fairness.
It is also a tool which measures the value of production in the economy, where a higher level of goods and services produced is seen as ‘progress’. In this case, money spent on reconstruction after a natural disaster, something which is detrimental to well-being, is considered ‘progress’.
Additionally, GDP makes no judgment about the productivity of economic activity. For example, expenditure on prisons, bombs, and tear gas have a market price and are a part of the domestic production. Because of this, the GDP considers the value of these goods as a positive step forward.
https://www.npr.org/2018/08/17/639250769/michael-green-what-does-gdp-not-tell-us
https://pixabay.com/photos/earthquake-rubble-collapse-disaster-1665878/
Alternative Measures of well being (P266-8)
There are lots of alternative measures and I have mentioned some already, but the ones mentioned in the syllabus are:
Read Tragakes P 266-268 and make notes on these- which do you think is the best and why?
Alternative measures of well-being- RWE-student task
Task: Using the links above
material living conditions (housing, income, jobs)
quality of life (community, education, environment, governance, health, life satisfaction, safety and work-life balance).
The happiness index looks at 6 key variables:
income, freedom, trust in government/corruption, healthy life expectancy, social support from family and friends, and generosity.
The happy planet index looks at 4 key variables:
well-being, life expectancy, inequality of outcomes, and ecological footprint.
2. HPI = "Wellbeing x Life expectancy x Inequality of outcomes" /"Ecological footprint"
3. OECD Better Life Index 2020
36) Greece
37) Turkey
38) Colombia
39) Mexico
40) South Africa
*The BTI only includes 40 countries; most of the countries included are members of the OECD and are developed countries.
https://www.oecdbetterlifeindex.org/#/11111111111
Note it is unlikely you’ll ever be asked any of these details!
Happiness Index 2020
1) Finland
2) Iceland
3) Denmark
4) Switzerland
5) Netherlands
91) Cambodia
92) India
93) Jordan
94) Tanzania
95) Zimbabwe
https://happiness-report.s3.amazonaws.com/2021/WHR+21.pdf
Happy Planet Index 2016
1) Costa Rica
2) Mexico
3) Colombia
4) Vanuatu
5) Vietnam
136) Mongolia
137) Benin
138) Togo
139) Luxembourg
140) Chad
http://happyplanetindex.org/s/hpi-data-2016.xlsx
Real world example – data analysis- Independent extension task- HW
Data Analysis Questions
Link to student notes and activities
https://docs.google.com/document/d/10MuQJs3PN6P1pF0YO-K1HQREdGFDmob_Fk2nw_SbeEA/edit
Conclusion: GDP is flawed and narrow as a measure of quality of life- other broader measures could be and are used such as UN HDI. However GDP/GNI is often included in these measures- just that on its own it is too limited
Test your knowledge on this unit: Kahoot!