Freedom of Expression
GDP challenged!
Gross Domestic Produce or GDP is widely used by economists to gauge the health of an economy, as its variations are, relatively quickly, identified. However, its value as an indicator for the standard of living is considered to be limited. Primarily GDP is considered for the purpose of gauging standard of that country at international level. However, some times this is used to gauge internal strength of the country. Criticisms of how the GDP is used are given here:
1. Wealth distribution – GDP does not take disparity in incomes between the rich and poor into account. However, numerous Nobel-prize winning economists have disputed the importance of income inequality as a factor in improving long-term economic growth. In fact, short term increases in income inequality may even lead to long term decreases in income inequality. Here one should keep in mind that GDP is measure not as long-term economic growth but present economic growth and so this argument of these Nobel-prize winners is not correct.
See income inequality metrics for discussion of a variety of inequality-based economic measures.
2. Non-market transactions – GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated. Unpaid work conducted on Free and Open Source Software (such as Linux) contributes nothing to GDP, but it was estimated that it would have cost more than a billion US dollars for a commercial company to develop. Also, if Free and Open Source Software became identical to its proprietary software counterparts, and the nation producing the propriety software stops buying proprietary software and switches to Free and Open Source Software (FOSS), then the GDP of this nation would reduce, however there would be no reduction in economic production or standard of living. The work of New Zealand economist Marilyn Waring has highlighted that if a concerted attempt to factor in unpaid work were made, then it would in part undo the injustices of unpaid (and in some cases, slave) labor, and also provide the political transparency and accountability necessary for democracy. Shedding some doubt on this claim, however, is the theory that won economist Douglass North the Nobel Prize in 1993. North argued that the creation and strengthening of the patent system, by encouraging private invention and enterprise, became the fundamental catalyst behind the Industrial Revolution in England.
3. Underground economy – Official GDP estimates may not take into account the underground economy, in which transactions contributing to production, such as illegal trade and tax-avoiding activities, are unreported, causing GDP to be underestimated.
4. Non-monetary economy – GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me mend my house now).
GDP also ignores subsistence production.
5. Quality of goods – People may buy cheap, low-durability goods over and over again, or they may buy high-durability goods less often. It is possible that the monetary value of the items sold in the first case is higher than that in the second case, in which case a higher GDP is simply the result of greater inefficiency and waste. (This is not always the case; durable goods are often more difficult to produce than flimsy goods, and consumers have a financial incentive to find the cheapest long-term option. With goods that are undergoing rapid change, such as in fashion or high technology, the short lifespan may increase customer satisfaction by allowing them to have newer products.)
6. Quality improvements and inclusion of new products – By not adjusting for quality improvements and new products, GDP understates true economic growth. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living. For example, even the richest person from 1900 could not purchase standard products, such as antibiotics and cell phones, that an average consumer can buy today, since such modern conveniences did not exist back then. Values taken while calculating GDP are relative and so present method of calculating GDP could mislead more than guide in the correct judgment.
7. What is being produced – GDP counts work that produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable amount of economic activity and thus boost GDP. The economic value of health care is another classic example—it may raise GDP if many people are sick and they are receiving expensive treatment, but it is not a desirable situation. Alternative economic measures, such as the standard of living or discretionary income per capita better measure the human utility of economic activity.
8. Externalities – GDP ignores externalities or economic wrongs (wrong doings due to economic activity) such as damage to the environment. By counting goods which increase utility but not deducting wrongs or accounting for the negative effects of higher production, such as more pollution, GDP is overstating economic welfare. The “Genuine Progress Indicator” is thus proposed by ecological economists and green economists as a substitute for GDP. In countries highly dependent on resource extraction or with high ecological footprints the disparities between GDP and GPI can be very large, indicating ecological overshoot. Some environmental costs, such as cleaning up oil spills are included in GDP. While calculating costs all costs are taken as positive (+) although costs such as those for repair of damaged things due to storm or medical expenses for epidemic should be taken as negative (-) to correct the true GDP.
To solve this disparity we may introduce GDP+ for positive produce and GDP- for negative produce (clean up etc.); finally adding them in the imperial formula as given above we get near correct value. That means, cost on cleaning and environs repair bads, should be considered as GDP-.
9. Sustainability of growth – GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment. For example, the large deposits of phosphates gave the people of Nauru one of the highest per capita incomes on earth, but since 1989 their standard of living has declined sharply as the supply has run out. Oil-rich states can sustain high GDPs without industrializing, but this high level would no longer be sustainable if the oil runs out. Economies experiencing an economic bubble, such as a housing bubble or stock bubble, or a low private-saving rate tend to appear to grow faster owing to higher consumption, mortgaging their futures for present growth. Economic growth at the expense of environmental degradation can end up costing dearly to clean up (GDP-); GDP does not account for this.
10. Purchasing power of money varies - One main problem in estimating GDP growth over time is that the purchasing power of money varies in different proportion for different goods, so when the GDP figure is deflated over time, GDP growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure. For example, in the past 80 years the GDP per capita of the United States if measured by purchasing power of potatoes, did not grow significantly. But if it is measured by the purchasing power of eggs, it grew several times. For this reason, economists comparing multiple countries usually use a varied basket of goods. Cost variation of different merchandises is not same for a period.
11. Quality difference parity - Cross-border comparisons of GDP can be inaccurate as they do not take into account local differences in the quality of goods, even when adjusted for purchasing power parity. This type of adjustment to an exchange rate is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. For instance, people in country ‘A’ may consume the same number of locally produced apples as in country ‘B’, but apples in country ‘A’ are of a more tasty variety. This difference in material quality will not show up in GDP statistics. This is especially true for goods that are not traded globally, such as housing, services etc.
12. Transfer pricing on cross-border trades between associated companies may distort import and export measures.
As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received, and can therefore underestimate aggregate utility.
Austrian economist critique – Criticisms of GDP figures were expressed by Austrian economist Frank Shostak. Among other criticisms, he stated the following:
The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption.
He goes on:
“For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.”
Such activities should be deemed as negative GDP (GDP-) however, it is not done at present practice in calculating GDP.
Austrian economists are critical of the basic idea of attempting to quantify national output. ‘Shostak’ quotes Austrian economist Ludwig von Mises:
“The attempt to determine in money the wealth of a nation or the whole mankind is as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimension of the pyramid of Cheops.”
Simon Kuznets in his very first report to the US Congress in 1934 said:
...the welfare of a nation [can] scarcely be inferred from a measure of national income...
In 1962, Kuznets stated:
“Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.”
Considering, here given, objection to use of conventional GDP concept, it appears that the time has come for the world to reconsider this manner of evaluating the economic worth of a nation. World Bank and other similar bodies have not explained their stand as against these objections, why? It is alleged that present method to calculate GDP is supported because it is possible to manipulate with real values through this formula to help interests of MNCs.
We shall study importance of PP and PPP soon.
You may contact me on my Email ID given below,
You are invited to visit my other blog if you are interested in stories.
http://ashokkotharesblog.blogspot.com
Visit my other blog for interesting topics: http://kothareashok.blog.co.in/
|
|
