Discuss whether GDP is a reliable measure of the differences in living standards between developing and developed countries.
Ans:
The level of development is basically measured by the
value of outputs of a country. The economists call this measure GDP (Gross
Domestic Products). We define GDP as the value of total outputs produced by a
country within a year. So it is widely used for the purpose of measuring the
levels of development.
GDP is used to compare the level of performances of the
different economies to other countries. Also, it helps to calculate the rate of
economic growth over a period of time. GDP is the most common method to
determine the levels of development in different economies. However, we
must a sensible use of GDP figures to get accurate measurements. For this case, inflation and the size of the population must be taken into account. Increasing price
levels, for instance, may raise the GDP figure more than the value of real GDP.
So ignoring the real change may lead to a wrong indication of measuring living
standards.
However, the reliability of GDP is the main question as the
indicator to measure the living standard of different countries. Firstly, in
national GDP figures, the regional variations in income per head, outputs, and
employments are shown clearly. For example, people in some regions may lead to absolute poverty or even some people deal with relative poverty, but in total
GDP figures the variations are not clearly classified. Also, the national GDP
does not show the distribution of income and wealth. So the unequal
distribution of income and wealth among the population may rise relative
poverty in many regions.
Moreover, higher GDP may experience increasing
environmental pollution and other negative externalities. These have obviously negative impacts on our
socio-economic welfare. Rising output means higher GDP, but the quality of goods
and services is an important factor for quality living standards. Besides, the
workers have to work for longer hours to achieve higher GDP, and they cannot
enjoy sufficient leisure time.
Furthermore, we need to consider the balance between consumption
and investment. If people devote too many resources to satisfying the short
term needs or want, there will lead to insufficient investment for long term
benefits. Faster economic growth may lead to higher living standards today, but it
will reduce scare resources that needed for future development.
GDP understates the level of development because it has no
accurate record for black and informal economic activities. The black economy
includes undeclared and illegal transactions. And informal activities include
non-monetary parts of the economy, e.g. barter trade and self-consumed goods. Lastly,
GDP figures are ascertained from millions of economic activities and returns.
Therefore the figures may not be exact or accurate due to precise and accurate
accounts.
Other measures like MEW and HDI should be
considered instead of GDP. MEW (Measure of Economic welfare) reflects the
country's development more accurately compared to GDP. It is an important
indicator to measure the development that overcomes the problems of using GDP. The
calculation includes GNP and NNP where add an allowance for leisure, various
public services and amenities, and various non-marketed goods and services. The
big problem of using MEW is to obtain reliable estimates for all additional
items it includes.
HDI, the Human Development Index is the best method to measure
living standards. HDI includes three different indicators. These are GNP per
head, life expectancy, and educational attainment.
Finally, it can be concluded that other composite measures
such as HDI and MEW can be a more reliable method of the difference in living
standards between developed and developing countries instead of GDP.
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