Limitation of GDP as a Measure of Economic Welfare

Limitation of sodding(a) domestic product as a Measure of stinting Welf atomic number 18IntroductionThere are respective(a) unalike indicators utilize by the economists to quantity the ontogeny of the deliverance and gross domestic product should be the superstar most comm only utilize in practice. It could radiate the quantitative changes of the frugal development, but its qualities. The terminus ad quem of gross domestic product in this area prevents it from measuring the stinting wellbeing muckle bring in. This essay will discuss how gross domestic product is reckon and the limitations of GDP in measuring the frugal public assistance. There will be also the introduction of the replacements of GDP which are essential to measure the economic eudaimonia.The Concept of Gross Domestic Products (GDP) and Its CalculationGDP is the abbreviation of unrefined domestic product. It refers to the market jimmy of all the nett goods and services produced by peerless co untry or region with the production factors in one year or in certain period of time (Gutierrez et al., 2007). It was source actual by the economist Simon Kuz meshs in the 1930s and has been gradually use by the governments of various countries to measure the total care for of the yield of the rescue after the Second land War. Since then, GDP has been the indicator for the measurement of development take aim of the economy. It is an important index of the general situation of the macroeconomics, which reflects the developments of the economy.GDP belongs to the case of the measuring of the aggregate economy. There are brinyly tierce regularitys to depend the value of GDP, namely, the production admittance, the income approach and the expenditure approach. They reflect the results of the national economy from different take places.The production approach searchs the economic results by summarizing the total output values of all the sectors of the economy and subtracting the value of all the intermediate goods. The approach only includes the value added in the production process, so it is also called the value added approach (Viet, 2009). The bit method is the income approach. It focuses on the income generated in the production process. dissimilar production factors are involved in the production process and they whoremonger get the income per their relevant contribution to the economic activities. The summary of all the incomes of the various production factors is the result of the economic activities. For example, labors and capitals are the main(prenominal) factors use in the production. So their incomes, the wages and the interest constitute the main part of the GDP calculated by theincome approach (Viet, 2012). The expenditure approach calculates the GDP from the view of the final exercises of the products and services. The results of the final products and services usually include two main parts, the consumption and the investing. And consumption covers the need from the household sectors, the government and the foreign consumers. So in the expenditure approach, GDP includes the household consumption, the investment, the government spending and the net exports. In practice, the expenditure approach is most common method used by the government of countries in the world. (Viet, 2011)The Limitations of GDPThe changes of GDP could reflect the skid of the economic development and most of the countries consider the enlarge of GDP as the targets of the economic issue. Although GDP has been used widely as the indicator to measure the development aim of the world economy, there are inherent limitation and weaknesses in this method that prevents its wider use in the economic growth. And it particularly reduces the expertness of GDP in evaluating the economic upbeat. The main limitation of GDP is that it does non reflect all the contents of the economic activities, which weakens the role of GDP as the indicator of th e economic welfare.GDP can non reflect the overall situation of races welfareGenerally speaking, the economic growth could bring the increase of stacks income, as well as their economic welfare. The per capita GDP is usually used to indicate the average level of peoples income in the countries. And it is also used to classify the counties of their economic development levels. solely it cannot reflect the differences of the peoples welfare caused by the differences of income distribution. For example, for the man having no money at all, he could become a billionaire in hurt of the per capita GDP when there is only he and Bill Gates in his country. unless he is not likely to enjoy the same welfare as Bill. So GDP, or the per capita GDP masks the veridical situation of the welfare people really get (Brenger and Verdier-Chouchane, 2007).Besides, there are plenty of things in peoples welfare, not just the economic one. The leisure and family amusement are also very important part o f the welfare. People would overhear little time to spend with families when they are busy in producing the final products and services. The increase of the GDP does not mean the increase of peoples overall welfare.The non-market economic activitiesBesides, what GDP does not cover is the non-market economic activities. Per the image of GDP, it reflects the market values of the final products and services. For the products and services that are not interchange on the market, their values are hard to evaluate. For example, the household full treatment washed-up by the full-time housewives, like cooking, cleaning, and taking care of the olds and children, are not paid in by the family. So they are not include in the calculation of GDP. provided if these works are done by the baby-sitters who hired and paid by the families, they will be covered by GDP, since they set out the market values. In the developed countries, there is a gamy level of the marketization of the housework. T he children will be sent to kindergartens, olds to the nursing home. People have more chance to eat outside instead of cooking home. on the whole these works will be calculated in GDP. entirely in the development countries, most of the housework is finished by the numbers of the family. And their efforts are not recognized by the market and the GDP. The same household works will make different contributions to the calculation of GDP in different countries. But for people no matter in the developed countries or the developing ones, these works increase their welfare (Bridgman et al., 2012).In the calculation of GDP, the lack of these non-market economic activities reduces the ability of GDP to give a full reflectance of the economic activities. So it could not tell the execute welfare people get from the economic activities.GDP does not reflect the eccentric of the economic developmentWhat people could get from GDP is just the number of the value added in the given time. It on ly reflects the number changes of the output of the economy or the quantitative growth of the economy. The quality of the output and the economy cannot be answered by this indicator. And the growth of GDP does not equal with the economic growth, since the economic growth also contains the improvement of the economic quality (Costanza et al., 2009).For example, the increase of GDP could not tell how the economy grows. There are usually three goaded forces of the economy, the consumption, the investment and the exportation. If the increase of the GDP is caused by the consumption from the household sector, the quality of the economic growth could be considered as a good growth. But if it is mainly driven by the investment, especially the one in the real estate market or the infrastructures, the quality of the economic growth is expenditure to worry, since this kind of growth cannot sustain for a long time. The investment only increases the number of GDP, but not the welfare people cou ld get.When using GDP as the main indicator to assess the economic growth, there would be some strange things in the development plans and practices of the governments. They would have the motivation to investment huge funds in the building of the infrastructures, like roads, railways and airports, since these projects would generate keen increase of GDP. And they dont have to consider whether these projects are necessary or not, which could cause the waste of the social and economic resources. Besides, accidents would be welcomed by the governments, since they also can increase the GDP. When there are accidents, the new vehicles or properties will be needed to replace the ones damaged in the accidents, which operator the increase of the final products and services. But peoples welfare does not see any increase in these activities (Costanza et al., 2009).What GDP provides is just the rimy numbers about the amount changes of the economy. It cannot reflect the quality of the econo mic growth.The surround cost and pollutionExcept for the limitation in calculating the complete contents and quality of the economic growth, GDP also cannot reflect the secluded costs of the economic growth, particularly the environment cost of the economic activities. GDP only covers the costs that could be exchanged and valued in the market. These environment costs, like the environmental psychological disorder and pollution, usually cannot be valued in the market and they are not calculated by GDP (Costanza et al., 2009).When developing the economy, it is needed to consume the natural resources from the environment. But the resources are limited. The excessive usage of the recourses in the current economic activities could bring the negative influence on the future development. And the economic growth is not sustainable in this model. But this cannot be reflected by GDP. Meanwhile, economic growth could cause the environmental disruption and pollution. These are also the costs of the economic growth. However, they are not include in GDP, since Mother Nature does not charge the price in humans economic activities. And the stupid humans will not calculate these costs until they pay for it.The Replacements of GDPThe limitations of GDP mentioned above have been assailable in practice and there have been some other indicators developed to replace GDP. These replacements of GDP make up the limitation of GDP in evaluating the welfare people get in the economic activities and help people to have a better understanding of the welfare people get from the economy.In this process, there are main two directions for the measurement of the economic welfare. One direction is to measure the total level of the economic welfare. This method is easy to measure and the result could reflect the differences between different countries. The second direction is to get the per capita level of the economic welfare. These two directions could be seen as the same one, since it is e asy to get the per capita results when people get the total level of the welfare.The GNI-Lorenz curveSince GDP cannot reflect the differences of the national income distribution, the Lorenz Curve is then developed to indicate the condition of the income distribution. It is developed in a coordinate trunk with the percentage of income and households as the axis. It reflects how the wealth of one country is distributed among the households. People could find the level of the inequality in the income distribution per the camber of the Lorenz Curve (Helene, 2010).The gross domestic income (GDI)The gross domestic income or GDI is another indicator used to reflect the condition of the economy. It calculates the income generated by the economic activities, which includes the compensation of employees, the gross direct surplus and the gross mixed income. This indicator could be seen as the adaptation of GDP calculated in the income approach (Fixler, Greenaway-McGrevy and Grimm, 2011). Si nce peoples welfare is largely influenced by the income level, so the changes of GDI could reflect the situation of peoples welfare.The physical quality of look index (PQLI)The physical quality of life index is developed by David Morris in the mid-1970s. This index is consisted of three main indicators, the literacy rate, the infant morality rate and the indexed life expectancy. The average value of these three indicators is the level of the physical quality of life. This index is easy to measure and understand. But it does not reflect the complete contents of the welfare. And the excessive attention to the wellness indicators reduces its ability to give a full explanation of the welfare level (Brenger and Verdier-Chouchane, 2007).ConclusionThe gross domestic product can partly reflect the results of the economic activities. But it cannot reflect the economic welfare, the non-market economic activities, the quality of the economic growth, and the environment cost and pollution. The se limitations prevent GDP from measuring the economic welfare people get from the economic activities. So that people have developed the new methods to replace GDP to measure the economic welfare.ReferencesBrenger, V. and Verdier-Chouchane, A., 2007. three-dimensional Measures of Well-Being Standard of Living and Quality of Life across Countries. World Development, 35(7), pp. 1259276.Bridgman, B., Dugan, A., Lal, M., Osborne, M. and Villones, S., 2012. Accounting for Household proceeds in the National Accounts, 19652010. Survey of menses Business, May, pp.23-36Costanza, R., Hart, M., Posner, S. and Talberth, J., 2009. Beyond GDP The Need for New Measures of Progress. The Pardee Papers No. 4. capital of Massachusetts Pardee Center for the Study of the Longer-Range Future.Fixler, D.J., Greenaway-McGrevy, R. and Grimm, B.T., 2011, Revisions to GDP, GDI, and Their Major Components. Survey of Current Business, July, pp.9-31.Gutierrez, C.M., Glassman, C.A., Landefeld, J.T. and Marcuss , R.D., 2007. Measuring the rescue A Primer on GDP and the National Income and Product Accounts. Washington, D.C. representation of Economic Analysis, U.S. Department of Commerce.Helene, O., 2010, Fitting Lorenz Curves. Economics Letters, 108, pp.153-55.Viet, V.Q., 2009. GDP by Production Approach A General Introduction with Emphasis on an co-ordinated Economic Data Collection Framework. New York United Nations Statistics Division.Viet, V.Q., 2011. GDP by Final Expenditure Approach an Operational Guide for Using commodity Flow Approach. New York United Nations Statistics Division.Viet, V.Q., 2012. Income Approach to GDP and Other Issues Relating to the digest of Household Income and usance Expenditures. International Workshop on Household Income, Consumption and Full Accounting of the Households Sector, 26-28 March, Beijing. China.