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Discuss the extent to which gross domestic product (GDP) is a useful measure of living standards and
economic development. [25]

Quick Answer:

The challenge of economic development is to im prove standard of living that calls for higher out put along with better education, higher standard of health and nutrition, less poverty, a cleaner en vironment, more equality of opportunity, greater individual freedom, and a richer cultural life.

So, in order to measure standard of living we, at first, must have a means of measuring the value of the nation’s output.

Economists believe that levels and growth of GDP is the best indicator of a nation’s output.

We define GDP as the monetary value of total output produced within the country over a twelve months period.

However, if we are to make a sensible use of GDP figures, we must take inflation and size of population into account.

In creasing price level, for instance, may increase a country’s GDP figure more than the increase in its real output.

While ignoring the changes in the size of population could give a wrong indication about the level of development.

We eliminate any distortion in GDP caused by changes in price level by measuring GDP at con stant prices while we factor in population by mea suring real GDP per capita.

It is calculated by di viding real GDP on total population of a country Hence it gives us an average estimate of how much of real goods and services is available for con sumption and investment to each individual citizen of a country.

Economists believe that there should be a strong positive correlation between real GDP per capita and standard of living; that is, greater production should move society toward” the good life” Therefore they view levels and rates of growth of "real” per capita GDP as an adequate measure of economic development However, even after making these adjustments a lot of them remain skeptical about the real GDP per head as the most reliable indicator of living stan dard and development.

Firstly, they argue that national GDP figures hide significant regional variations in output, employ ment and incomes per head of population.

Within each region there are also areas of relative pros perity contrasting with unemployment black-spots and deep-rooted social and economic deprivation Also, on their own, GDP per head docs not show the distribution of income and the uneven spread of financial wealth.

Incomes and earnings may be highly unequally distributed among the population and rising national prosperity can still be accom panied by rising relative poverty.

Secondly, higher levels of per head GDP might have been accompanied by an increase in pollu tion and other negative externalities which have a negative impact on economic welfare.

Moreover output figures tell us little about the quality of goods and services produced.

Also, rising national output might have been achieved at the expense of leisure time if workers are working longer hours.

Furthermore, we also need to analyse the balance between consumption and investment.

If an economy devotes too many resources to satisfy ing the short run needs & wants of consumers, there may be insufficient resources for investment needed for long term economic development.

Faster economic growth might improve living stan dards today but it leads to an over-exploitation of scaree economic resources thereby limiting future growth prospects.

In addition, GDP figures might understate the level of development because of the existence and growth of black or informal economy.

Black economy includes illegal and undeclared transac tions while informal sector is the non-monctiscd part of the economy, it includes output that is not sold at market prices but involves barter trade, and self-consumed products.

The Economist&//39;s latest estimate for the total value of the black economy throughout the world is over $10 trillion The scale of the underground economy is esti mated to average 15% of national output for rich economics and 33% of national output for devel oping economics.

According to their survey, Nige ria and Thailand have the world's largest black economics, both accounting for more than 70% of their official GDP.

Lastly, GDP figures are calculated from millions of different returns to the government.

Inevitably mis takes are made- returns are inaccurate or simply not completed.

Therefore the figures are not exact and accurate and do not provide a precise and accurate account ot total output.

So, It is believed that the numbers cannot capture our true economic well-being of a nation.

Econo mists point out that many qualitative changes could improve standard of living ot a country without necessarily achieving higher real GDP per head, such as reduction of crime and violence, greater equality of opportunity, improved racial harmony, and reduction of drug and alcohol abuse.

So, the economists have developed some notable alternative measures of economic development.

For instance, compared to GDP per head, an alterna tive measure of economic welfare (MEW) better reflects the state of development.

MEW is one of the alternative measures developed to overcome the problems of GDP as an indicator of develop ment.

This starts with GNP and NNP.

To this we add an allowance for leisure, for various non-mar keted goods and services such as housework and underground activities, for the services of various public amenities such as parks and roads, and for private durable goods such as furniture and jewellary.

On the other hand, various items are subtracted.

These included regrettablcs’ such as expenditure on defence and commuting to work, and various 'bads’ such as pollution.

Also various intermediate items such as the benefits of educa tion are subtracted.

However, the big problem with using MEW is in obtaining reliable estimates of all the additional items it includes.

As a result it has not been adopted by governmental statistical agencies around the world.

The most widely used measure of quality of life is The Human Development Index (HDI) that has been developed under the United Nations Devel opment Programme.

The Human Development In dex (HDI) is the average of three indicators • Standard of living, as measured by real GNP per capita (PPP$) • Life expectancy at birth, in years • Educational attainment, as measured by a weighted average of adult literacy (two-thirds weight) and enrolment ratio (one-third weight) The closer the HDI is to I, the closer the country is to achieving the maximum values defined for each of the three indicators.

The advantage of using HDI is that it highlights the fact that people’s welfare is influenced not only by the goods and services available but also by their ability to lead a long and healthy life and to acquire knowledge, a combination of both qualitative and quantitative factors.

Clearly, this index gives us a better way of estimating quality of life both in developed and developing countries, however, it is far from being a perfect measure of living standard.

Economists have recently been looking at ways to include other factors in their measurement of living standard.

As a result they have developed Multi dimensional poverty index (MPI).

The MPI as sesses poverty at the individual level.

If someone is deprived in a third or more of ten (weighted) indicators, the global index identifies them as ‘MPI poor' , and the extent - or intensity - of their poverty is measured by the number of deprivations they are experiencing.

The MPI has three dimen sions: health, education, and standard of living.

These are measured using the following 10 indica tors.


Education • Years of Schooling: deprived if no house hold member has completed five years of schooling.

• Child Enrolment: deprived if any school-aged child is not attending school in years 1 to 8.

2 Health • Child Mortality: deprived if any child has died in the family.

• Nutrition: deprived if any adult or child for whom there is nutritional information is malnourished.


Standard of Living • Electricity: deprived if the household has no electricity.

• Drinking water: deprived if the household does not have access to clean drinking water or clean water is more than 30 minutes walk from home.

• Sanitation: deprived if they do not have an improved toilet or if their toilet is shared.

• Flooring: deprived if the household has dirt, sand or dung floor.

• Cooking Fuel: deprived if they cook with wood, chareoal or dung.

• Assets: deprived if the household docs not own more than one of: radio, TV, telephone, bike, or motorbike, and do not own a car or tractor.

While both HDI and MPI use the 3 broad dimen sions health, education and standard of living, HDI uses only single indicators for each dimension of poverty and MPI uses more than one indicator for each one.

Therefore HDI has been criticized for ignoring other parameters.

In comparison to HDI the MPI creates a more vivid picture of people liv ing in poverty within a country.

It is the first in ternational measure of its kind, and offers an es sential complement to income poverty mcasuics because it measures deprivations directly.

For all of these reasons, MPI is believed to be more useful measures of living standard for countries at the early stages of development because it gives them a fair assessment of their levels of develop ment.

It therefore follows that MPI is a more useful measure of living standard and hence the level of development of countries than real GDP per head.

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