How can we measure the economic growth of a country? Experts have proposed many techniques to assess the economic progress of a country. One of these techniques is to calculate the sum of all the goods and services produced in the country which is known as gross domestic product (GAP). The indicator was created in the wake of great depression in sass and still is used to measure individual countries’ economic performance.
But now most of the economists claim that GAP alone cannot reflect the economic performance of a society because it has many flaws and does not acceptably measures the household reductions, voluntary work, defensive and remedial spending and cash for clunkers. To begin with GAP does not account for the household productions which have sizable effect on the economy of a nation. Unpaid work for instance, causes fall in GAP as there is no value addition. For example, if a person cooks food for his or her family then it causes fall of GAP but if the family hires a chef then GAP boosts up.
Let’s take the example of drying clothes in sunshine. If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product but if you hero your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable and give GAP a bit of a bump. This seems illogical that if a person reduces his or her consumption then it will cause GAP to drop, eventually resulting into reduced welfare of the nation. According to various studies carried out in France, domestic production could represent as much as 75% of standard GAP.
If GAP does not accurately responds to domestic production then how it can be considered a good measure for the welfare of a nation? Moreover, GAP does not correctly respond to voluntary work and public administration resulting into imperfect measurement of the welfare of a nation. A bicycle repaired by a friend makes GAP fall if the work used to be done by a professional. Thus, a society where voluntary work is widespread will enjoy a higher level of economic well-being but a lower GAP. As far as public administration is concerned, GAP always underestimates the contribution of public services.
They are generally not bought by anyone on a market. For example, public gardens maintenance or tax collection. By the same token, a free service resulting from a past public investment (a road, a fountain, a public park or a public sport facility) will not appear in GAP, contrary to its private equivalent (priced road, private sport facility, etc. ). Besides household production and voluntary work, another major flaw in the estimation of economic growth by GAP is that it does not appropriately measure production and often Just represent it as a compensation for a previous destruction.
How Can We Measure the Economic Growth of a Country? By honoraria chicanery causes a rise in GAP. Another similar example is a boom in the business cycle after the period of recession. Now consider the upsurge in the income of the lawyers. If lawyers prosper because there are more crimes and more offences, does that mean the country is richer? Obviously not, but GAP states country is richer because GAP does not count for these crimes rather it only takes the rise in the income of the lawyers into account.
Moving further, production is the decline of human and natural capital. But while calculating GAP this definition is mistreated. This can be illustrated by the example of two countries having same GAP but depreciation of human and natural resources are not same. It reminds us of those companies who report profits only by under-reporting depreciation of assets. The case is not Just theoretical: Britain and France have roughly the same GAP but British workers work 25% more.
Furthermore, the contribution of defensive and remedial spending towards GAP has many shortcomings. For example, expenditures on health care, pollution abatement, flood control and costs associated with population growth and increasing arbitration including crime prevention, highway construction, water treatment and school expansion increase gross domestic product, although mostly what we aim to buy isn’t an improved standard of living but the restoration or protection of the quality of life we already had. Polled) In this case, it’s clear that GAP indicates the growth in the economy but it’s only the maintenance of our standard of living. Thus GAP is not reliable to Judge the standard of living of a community. What’s more is the cash for clunkers whose influence on GAP is also flawed. The new ar purchases are added to GAP, but the destruction of the older vehicles is not subtracted. If instead we had a trade in program for new energy efficient homes that required destroying the older, less energy efficient home, we would reach a different result about GAP effects.
The new home purchase would add to GAP as for cars, but the destruction of the old home would result in a reduction of GAP because imputed rent on homes is included in GAP unlike cars. In this case, the economic multiplier effects are different about two very similar programs and as a result our economic elicits are affected. There are also hidden problems like underground economy which can’t be taken into account as there are hardly any statistics available. Polled) If economic development is indicated by GAP, then our experts are proposing faulty policies because GAP is not an accurate measure for the economic growth. If we consider the problems in the calculation of GAP, then inaccuracy of the indicator clearly depicts that it’s not an adequate measure of economic progress. For an instance, let’s assume that GAP is a good indicator of economic well being. In this ingle number, you get an idea of whether the economy is expanding or contracting.
Paul Samuelsson, Nobel Laureate and author of many textbook references, once described GAP as “truly among the great inventions of the 20th century, a beacon that helps policymakers steer the economy toward key economic objectives”. But, we forget that how hard it is to accurately sum all of the goods and services produced in our definition of production is not clear. We often mix the restoration and production. Secondly, statistics for each component of GAP are not easy to gather. For example, here are no statistics available on black economy.
Third, we need a sophisticated system that can add it all together, from the number of new cars and haircuts, to the volume of teaching etc. (Blades et all) Due to these problems, GAP cannot appropriately measure the welfare of a nation. Given the fundamental problems with GAP as a leading economic indicator, we should not consider it as a measurement of economic well being. Instead, it is Just a measure of economic activities within an economy and no where it is close of accurately reflecting the living standards of the people of that economy.