Introduction
Almost everything in this world needs an indicator which will allow us to know and recognize how every performance varies. With such instruments, we can be able to determine on what part needs improvement. But before we depend too much with these indicators, it is important to know how reliable it is so that errors would be avoided as time pass by. By that, the real progress of the activity will be viewed correctly and further improvement will be made.
Although the GDP use to measure the economic growth of a country, it was cited that something is wrong in its manner of measuring progress. This error probably creates such imbalances that affect the economy and the society.
The global upswing continues to be accompanied by major economic imbalances as of now. Unfortunately, did most of us understand this very serious situation regarding our economy? Although many economist have been trying so hard so figured out what would probably be the real solution to this. Still, there are a large number of people who are incapable of understanding such dilemmas that are continuously occurring. Are they just not really aware of it? Or they just take things for granted to hide the truth about it? In every society the government plays a very important role but what if they are the one who can’t be responsible enough? Having a problem that deals with the economy is a very complicated and broad topic because it almost comprises everything. In the case of the GDP’s (Gross Domestic Product), it was being criticized by its poor manner of measuring economic growth. How will these condemns affects the economy? And does the government have something to with it? And if they do would they acknowledge their fault or blame it to the people? Are these accusations supports valid truths? As the famous philosopher Voltaire says, “It is dangerous to be right when the government is wrong”. Nonetheless, all these upbringings had a corresponding solution.
Defining GDP
The Gross Domestic Product is usually define as the gauge indicator that economist uses to measure the economic stability of a certain country. It focuses on the region in which an income is generated or where the output is produced rather than who produces it or either how it is being produced. Some economist says that if the GDP is higher, the growth of the economy is rapidly exceeding. But there are concealed imperfections behind these measurements conducted. That’s why a lot of criticisms are being thrown with these concepts of GDP mainly because there are a lot of things to be considered to come up with a right conclusion on how it really implements the correct measurements of the economic growth.
What are the concerns comprising the Gross Domestic Product? As stated, it tends to be an indicator of economic boom. The major advantages of using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently. However, it disadvantage is that it is not a measure of standard living. It is only intended to be a measure of a particular economic activity within a certain country. In this case, the negative aspects of it merge unintentionally. The GDP fails to delineate the “health” of the economy because it only views limited scope of the subject matter. In what way? There are a lot of misconceptions resulting to deficient knowledge and carelessness of such economists. By that, criticisms tend to arrive and they targeted the wrong concept of GDPs way of measuring economic progress. In fact GDP measures almost everything except the things that makes life worthwhile. However, GDP was not created to play such role. It’s just that it doesn’t make enough clear distinction between those transactions that adds to the well – being and those that diminished it. Instead, it provides the tally of all these activities without separating the productive to the destructive ones. It records every monetary action positive so as a result, it worsen the social structure and natural habitat in the economy.
With this breakdown happening. Should the government start to make some move about it? Or they would just sit back and relax because most of these activities boost the value of GDP and therefore, the economy is heading on the right track.
The Shortcomings
The GDP was face with a lot of pros and cons. The negative and the positive effects that it can bring to our society might lead to something devastated in the near future. But what is really wrong with the GDP?
Income is use as the basis for poverty evaluation. Part of the central concern of the economic theory and economic policy is the income distribution. Such classical economist like David Ricardo, Adam Smith and Thomas Malthus were mainly concerned with the income distribution between land, labor, capital and production as the main factors. However, in the modern period, the economist was mainly concerned with the distribution of income across the individuals and households. In this case, GDP fails to consider this factor because apparently it ignores the differences of the income between the rich and the poor although there is a wide gap between the two. It takes no account to the inequality of income, wealth and the spending power as well. It had been a long topic of argumentation regarding this. The poor becomes poorer and the rich becomes richer.
That’s why economist has come up with various strategies that might overcome this problem. The income inequality metrics was use by the economist to measure the proper allocation of income and economic equality among participants in an economy. It measures the inequalities and not the probable cause of inequality. For an accurate measurement of it, they should take in consideration the available source of income and proper implementations of taxes.
More often, GDPs concern only lies with the amount it measures as a whole. But it doesn’t give importance to the welfare of its community. Just like for instance, there are a great number of consumer on a new product. And it will be probable that it can cause a higher value for GNP. But unfortunately these products quality are not taken into consideration other wise, the value of GNP here are merely a result of inefficiency and waste. Compare to if consumers will buy high durable goods. Although it will only provide a lesser value in terms GDP. Nonetheless, it will give the consumers a great satisfaction with the product they were using.
Another example is when a calamity hits a country and leaves tremendous damages. The rate of GNP will tend to rise because of there will be a lot of constructions made for the infrastructures but do they know the negative outcome of it? The lives and properties destroyed are such things that are too much too handle especially if the country is not that progressive. So this is the question that bothers most economists. How can you say that a country is on top of its growth in terms of GDP if they were suffering from such disaster? There are a lot of undesirable situation that can cause the rise of GNP. But do we need all this misfortunes to happen just to be able to achieve a progress? Even the use of health care that was implemented by the government is another example of it. It can also raise GNP but who will be delighted seeing most the people in his country is suffering from diseases. It was such a very unfavorable scenario to look at.
Externality is also a part of GDPs criticism. This is an impact on any party not involved in a given economic transaction. Either the causes were good or bad. There are two types of externalities, the positive externality and the negative externality. In the case of the positive externality, a good example of is having a good invention. This invention will soon benefit not only the inventor itself but as well as the people who might need it. In both ways it provides positive outcome. In terms of the negative side, mostly the externalities occur is the damage in the environment. The best representation of it is the climate change due to the green house gas emissions from coal, oil and gas. This case so far is the number one externality of all economic activity. Unfortunately, GDP also ignores these following consequences. These are some reasons why even ecological environmentalists are not in favor of the GDP because for them it exploits the natural resources and ignores the value of renewable and non-renewable resources to the economy.
Another part of the GDPs criticism is that it doesn’t measure the sustainability of growth and fails to take into account of the black market. The sustainability of growth was simply defined as to meet the needs of the present time without endangering the ability of the next generations to meet their own needs. In contrary with this, some countries are fond of exploiting their natural resources right now without even considering the fact that the next generations are still in need of that. Although they can achieve high GDP, they didn’t thought that it would only be temporary especially if they start to loose their resources at an early point of time.
On the other hand, the black market or the underground economy is just another fact that makes GDP an inaccurate way of indicating the growth an economy. The underground economy includes most of the illegal sources of income which obviously are not registered. This includes activities and services such as transportation providers, illegal drugs, prostitution, weaponry, alcohol and tobacco and the most popular now a days, the copyrighted media. All these illegal services tend to make the figures of GDP abnormal. Despite of its unlawfulness, all these services are greatly patronized by a large number of consumers.
The alternatives
Because of the irregularities that GDP have been compromising. The economists come up with an option to replace it. In 1995, Mathis Wackernagel, the director of Indicator Programs at Redefining Progress based in San Franciso developed one of the very first alternative to GDP. It is the Genuine Progress Indicator or the GPI. It was rendered out of the theories of the green economics as the barometer of economic health. The main objective of it is to cut off the inadequate and misleading way of measuring the economic growth. GDP is often justified by the lack of a concrete alternative, and the belief that there is no valid way to approximate the value of social and economic factors in economic terms. That’s why GPI was developed to demonstrate that both of these obstacles can be overcome.
According to Senator Byron Dorgan (1995), the GPI reveals that much of what we now call growth or GDP is really just one of three things in disguise: fixing blunders and social decay from the past, borrowing resources from the future, or shifting functions from the traditional realm of household and community to the realm of the monetized economy.
As part of changed that they want to implement in the economy. They take the GPI as their first step to improve and broaden the accounting framework that guides public policy.
But that time, at the Fordham University in New York. They also came up with another gauge of well – being. It is the Index of the Social Health. In here their main focus was to the nation’s health. Like the GPI, they reinforce the need for new definition of growth and progress by measuring the health of the community and not the success of the particular policy or program. More and more community project indicator projects have emerged following the same concept incorporated with the latter. They have this goal of protecting the environment and preserve the well – being that has been the number one bearer of all the negativities the GDP produce.
Adjustment with Genuine Progress Indicator
It would be quite impossible to obtain such progression on the economy without making any sacrifices. Not all things would be beneficial for both parties. So how can it be possible to create a symbiotic relationship between the nature and the economy? After coming up with the GPI, promoting it became their next agenda. According to the speech of Robert F. Kennedy, we seem to have surrendered community excellence and community values in the mere accumulation of material things. We contributed nothing beneficial to our environment.
To minimize the continuous errors that GDP has been input to our system. GPI creates several adjustments. It subtracts the cost of long-term environmental degradation, air pollution, water pollution, ozone depletion, air pollution, noise pollution, loss of farmland, loss of forests, loss of wetlands, it adjusts for net capital formation and net foreign borrowing, it minimizes the cost of crime, auto accidents and cost of consumer durables. At the same time it adds the value of the service from the household infrastructures, highways and streets and the value of volunteer work. In short, the GPI handles not only the monetary factors but as well as the social, environmental and economic phenomena that GDP fails to consider. We’ve been so busy counting everything on which we spend money, and yet we assign no value to several vital activities that really contribute to our well – being.
Conclusion
With respect to Simon Kuznets, the GDPs principal architect. It is very unintentional that GDP was created with this objective of constructing an illusion in economic progress. Having too much of everything might not be better. At this point, everyone should acknowledge the fact that there is an irregularity unfolding the GDPs way of measuring economic progress. The growth of the economy should not be based only on the numerical value it provides to the statistics studies. But as well on how it was accomplished.
Everything might appear successful right now. But try to consider the things that are involve in every aspects of the situation given. If you have a car accident, ongoing treatment for cancer, or filing for divorce, the following misfortunes in your life helped “boost” the said economic growth. Quite annoying but that was the fact beyond GDPs way of calculating progress. Aside from that even the things that affects our natural resources helps to climb up GDP into a higher value. It just like that the more harmful things it can be the better to our economy. Sad but true, that crimes, gambling, pollution and other degrading activities contributed a lot in our economy. And by this point in time we assign no values to our natural wealth. People can sell all the fish they can caught, cut all the trees they can make for furniture, kill all the animals in the wild for clothing and for food. Obviously it can provide many earnings to them. They can harvest as many as they want right now but do they ever think of the next generation? They only reduced the flow of goods and services in the future. Lack of natural capital may lead to a more serious problem.
As Paul Hawken stated, the limits to increased fish harvests are not boats, but productive fisheries; the limits to irrigation are not pumps or electricity, but viable aquifers; the limits to pulp and lumber production are not sawmills, but plentiful forests. Nonetheless, our natural resources play a very important role in our economy. At this point the government should justify these things. It is not enough to earn more profit right now. They should make a move on how they can come up with necessary activities that would also be beneficial to the environment. Enough exploitation to our natural resources by this time. The obsession with growth as well as its confusion with the genuine development and the quality of life have caused misleading signals to the leaders and public alike, distorted policy priorities, blunted effective remedial action for environmental and social problems and led us down to a dangerous and self – destructive path. Maybe it’s the reason why growth isn’t always a good thing. So, the next time you will encounter a headline which states that GDP is growing up it isn’t a good news at all. In fact, it is more alarming than and quite just as same as reading a headline pertaining to various heinous crimes.
With these great numbers of criticisms that GDP is confronting right now, there is no excuse that the following are such critical judgments. The negative aspects of GDP should become an eye opener to everyone of us. It is quite threatening to know all these factors affecting the growth of our economy involves a lot of undesirable circumstances in our lives. However now that these things have caught our attention, then it would be better to work on it step by step to come up with such accomplishments that will benefit all of us.
However, GPI doesn’t claim itself to be perfect. And there is no such thing however. What it tries to express is that its construction is based on the recognition that we do not live in an economy but in a society and that society itself is embedded in a natural environment. It only corrects the errors inherited in the system of GDP. Being equipped with a lot of alternatives will just make a better future for all of us. Remember that growth is not merely about jobs or profits. Do not wait for the time wherein you almost forgot the meaning of having a “good life” because you’ve been too much busy contributing to activities which are no longer sensible.
Try promoting the concept of well – being. That happiness is one thing that money cannot buy. There is a need to shift gears in able to surpass all of this. Having trapped with this kind of situation for so long tends to create an illusion that it is all the material things in our life that completes us. What is needed are measures of well – being, prosperity and progress that gives more values to the non – material things in our life that basically makes the true basis of wealth. And in order to achieve it, there should be a restrain from using GDP in measuring our well – being and economic growth statistics. Since it only measures the quantity of the market activity without taking into consideration the social and ecological cost involve. That’s why it became an inadequate and deceptive measure of true prosperity.
It was never too late to renew our beliefs. As the world becomes more and more advance, it would be better to value our natural capital more for it has a serious effect in our economy. Let us give the next generation the legacy of valuing the real strength that we have in abundance right now. Let us bind together all the knowledge that we have at this point in order to attain a better future for them. Whatever type of indicator might be develop someday in the near future just to express the growth of economic progress still it would be better if it is always base on what we really need as human beings living in a society embedded in a natural environment.
Credit:ivythesis.typepad.com
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