Is GDP a good measure of economic activity and well being?

Essay, 2012
14 Pages, Grade: A - 70


Table of Contents

List of Abbreviations

List of Figures

List of Tables

1. Introduction

2. Main Body
2.1 GDP, Economic Activity and Well-Being
2.2 Limitations of GDP by Comparing Countries

3. Conclusion

4. List of References

5. Appendix

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Bergheim, S. (2006, p.3), the many elements of happiness and well-being

List of Tables

Table 1: Data adapted from: World Bank (2012), Total GDP, Population and GDP per Capita, own created table

Table 2: Data adapted from: World Bank (2012), Data Bank for Table 1, own created tables

1. Introduction

It is generally agreed today that a well-known indicator to measure economic activities is the gross domestic product (GDP).Although the GDP is heavily discussed in science, economics and politics it has emerged as particularly important for both economic assessment of countries and even for well-being (van den Bergh, 2009).

The main question which arisesis: Does the GDP illustrate a possibility to quantify economic activity and well-being and thus,can GDP compare countries with each other adequately?

This essay examines the topic:

‘Is GDP a good measure of economic activity and well being?

Give reasons for your answer.

What particular problems arise when comparing GDP across countries?’

The structure of this paper refers to the key figure GDP. The main body is separated into two parts. Firstly, chapter 2.1 will consider GDP as a measurement of economic activity and well-being. Secondly, section 2.2 will examinepotential limitations to compare GDP across countries by stating arguments.

Finally, the conclusion will abstract the main arguments and will give a firm stand.

2. Main Body

2.1 GDP, Economic Activity and Well-Being

The first aspect to point out is that the first attempts to measure economic activities stemmed from the 17th century whenSir Petty estimated a nation’s income (England, 1999, pp.373-374). Carson cited in England (1999) notes that the World War II provoked the creation of a standardised national accounting (NA). In-depth, the product of these forces is the GDP which was developed in the 1930s in the US (EurActiv, 2009). In detail, GDP was used to provethat the American economy provides enough military supplies and that war production can be maintained permanently (Marcus and Kane, 2007). However, GDP is widely seen as an important advancement in macroeconomics (Jolly, 2009) and different authors state the significant influence in both businesses and politics (van den Bergh, 2009 and Cohn, 2007). Sloman and Garratt (2010, p.260) define GDP as the ‘value of output produced within a country over a 12-month period in terms of prices actually paid`. In contrast, the Gross National Income (GNI) ‘is the output produced by the citizens of a country’ (van den Bergh, 2009, p.117).GDP and GNI differ only slightly from another (Lipsey and Chrystal, 2007, van den Bergh, 2009 and Giovannini, Hall and D’Ercole, n.d.). In mathematical terms, Carbaugh (2011, p.225) provides that the GDPformula consists of consumption, investment, governmental expenditures and the result of subtraction from exports and imports.

GDP= C + I + G + (X – M)

GDP is measuring by both total income and total expenditure of goods and services (Mankiw and Taylor, 2006).Moreover, they note that GDP can be expressed as per capita figure by dividing it by the total population. Additionally, Giovannini, Hall and D’Ercole (n.d., p.1) emphasise that GDP per capita (GDPPC) offers a possibility in developed countries to measure the well-being of a country’s population as long as ‘basic necessities of life remain scarce’. In accordance to Gans et al. (2011, p.558) and CEC (2009, p.10), GDP is the best factor to measure the performance of a single economy. Also, Cohn (2007, p.76) citing Nordhaus and Kokkelenberg (1999, p.27) states that GDP is an ‘excellent proxy for national economic well-being and maximising GDP is an excellent strategy for maximising national well-being’. In detail, the GDP provides the key indicator for measuring economic activities and even well-being and serves as guide for decision-makers and global businesses (European Environment Agency, 2009 and Fox, 2012). Well-being can be defined in two ways.Firstly, ‘in terms of pleasure attainment and pain avoidance’ and secondly, ‘in terms of the degree to which a person is fully functioning’ (Ryan and Deci, 2001, p.141).

The other side of the coin is that scientists argue that GDP is not a good measurement for well-being. The discussion about GDP was first mentioned by its inventor Simon Kuznets (Baker, 1999). Kuznets argues that the well-being of nations cannot be explained by measuring the GDP itself (Spiegel Online International, 2009). Graham (2011, p.106) citing Robert F. Kennedy (1968): ‘yet the gross national product [...] measures everything, in short, except that which makes life worthwhile’. Van den Bergh (2010, p.541) states the term ‘GDP paradox’ which expresses that the role of GDP in politics, science and economics is significant, while there is a strong evidence that GDP is not an indicator for well-being. Baumol and Blinder (2011, p.89)emphasise that GDP only includes market activities and not measures leisure activities. Moreover, Fox (2012) argues that GDP disregards unpaid household work and economic and environmental sustainability. Finally,Osberg and Sharpe (2002) conclude that well-being has increased in slower pace than GDPPC within 25 years.

However, with the establishment of the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) in 2008 the GDP was in the centre of consideration (Stiglitz, 2009). The key findings reflect the needs of new measurements of well-being in order to assess constraints such as climate change (Hall, 2009). To underline these arguments, one need only refer to figure 1 in which GDP distinguishes happiness and well-being.

illustration not visible in this excerpt

Figure 1: Bergheim, S. (2006, p.3), the many elements of happiness and well-being.

As shown in figure 1, GDP covers only the hard facts of an economy. Moreover, areas such as happiness, living conditions and economic well-being are notincluded. To cover those areas, the literature provides alternativese.g., theHappy Planet Index and many more (Costanza et al., 2009). The CMEPSP concludes that theseindeces are flawed (Constanza et al., 2009 and Hall, 2009).

2.2 Limitations of GDP by Comparing Countries

Besides the heavily discussed term GDP in connection with the assessment of well-being, there are also limitations of GDP by comparingcountries with each other. The first aspect to point out is that the GDPPC is more meaningful than the key figure GDP itself (Beardshaw et al., 2001). To underline this fact one need only refer to the World Bank (2012) mentioning some representative GDP key figures.

illustration not visible in this excerpt

Table 1: Data adapted from: World Bank (2012), Total GDP, Population and GDP per Capita, own created table.

As shown in table 1, the total GDP amount of China is the second highest, globally (World Bank, 2012). Nevertheless, when comparing this figure with the GDPPC one recognises that China is still a less developed country in comparison tothe other countries.

However, there is the problem of an equal measuring GDP because each country quotescorresponding Data with different precision in terms of data-collection, etc. (Tucker, 2010). Moreover, some data underemphasise the GDP due to not charting specific goods and services such as home-based activities, illegal employment, tax evasion (Sloman and Wride, 2009). Another example refers to income distribution problems because countries have relative different incomes e.g. only few Saudi Arabian households have the main income of the country (Mukherjee, 2002). A next constraint describes currency conversion problems in order to contrast countries (Beardshaw et al., 2001). As Hansen (2006, p.35) points out it is necessary to convert currencies into a single basis such as the US Dollar to receive a contrastable key figure. Also, conversion can result from market exchange rates, but the large disadvantages areongoing fluctuations on the markets (Greenhalgh and Rogers, 2009). The last argument faces this problem and likewise illustrates a major constraint. The idea of purchasing power parity (PPP) ‘rates are calculated by comparing a broad range of prices in each country [...] using the ratio of average prices as exchange rates’ (Greenhalgh and Rogers, 2009). As Mukherjee (2002, p.238) explains, diverse PPP ‘that affect living standards’ can even influence the GDPPC. However, PPP exchange rates are the most common technique to face the conversion problem (Greenhalgh and Rogers, 2009). Finally, GDP measures only the economic output and it ‘cannot be expected to measure all economic aspects.’ (Hoag and Hoag, 2006, p.259).

3. Conclusion

The arguments that this paper shows identify that GDP is a heavily discussed term in sciences, economics and politics. Although GDP was developed in the 1930s its influence is undeniable and will endure in the long-term. However, GDP was created to measure the production activities of a country and not the well-being of human beings. Thus, it necessary to design a standardised key figure to measure well-being and to face major forces such as climate change, etc.

The limitations of GDP in terms of comparing countries are many-sided. On the one hand, measurement and income distribution problems distort the key figure itself. On the other hand,currency and PPP problems influence the accuracy and present the vulnerability of the key figure itself. Finally, one can state that without incentives it is hardly to achieve sustainable economic growth.


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Is GDP a good measure of economic activity and well being?
Heriot-Watt University Edinburgh  (School of Management and Languages)
A - 70
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Niels Aulich (Author), 2012, Is GDP a good measure of economic activity and well being?, Munich, GRIN Verlag,


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