IS THE GDP OVERRATED?
Introduction
Gross Domestic Product (the GDP) is accepted as one of the main economic indicators. By definition, the GDP is the sum of the values of all the goods and services produced in specific time period in a country by using the current prices. We consider that high amount of production allows us to build a well-designed civilization. If a country can produce more than the needs of the citizens and export the excess production to the other countries, then this country can reach the desired goals. In another word, the GDP is generally accepted as an indicator of well-being. Most of the international organizations and authorities use the GDP for comparing countries and regions in the world in terms of economic and social development.
Also, some variables are derived from the GDP statistics for measuring the well-being of the society. The GDP per person is a derived variable. The GDP per person is used for observing the income inequality in societies. The Gini coefficient is a result of a simple calculation by using the GDP per person. Consequently, the GDP and the other variables derived from the GDP is an important indicator for human well-being; however, we need to develop a better indicator because the GDP calculation or approach neglects important factors influencing the human life and economy. Eventually, use of the GDP as an indicator of human well-being is questioned by the economists and the professionals. In the next part, we will argue why the GDP is required to be questioned.
We need to question the GDP, the use of the GDP as an indicator of human well-being, and the GDP calculation approaches. Even though it is hard to calculate the GDP because it involves all the production activities in the economy, it has a basic idea. If a country can produce a large amount of goods and services and market them inside the country and export the goods and services to the other countries, then this country is considered as developed. However, this is only the definition of the economic growth. The economic growth does give us an insight about the socioeconomic development; however, it is not enough to evaluate the level of socioeconomic development. Simple thinking reminds us that the term of “development” includes the term of “economic growth”. The economic growth does not include the development.
The definition of the economic development is more complex. The GDP cannot measure the economic development fully. Because the economic development is defined by the Harvard Professor Michael E. Porter as follows: " long-term process of building a number of interdependent microeconomic capabilities and incentives to support more advanced forms of competition" (Porter, 2000). Many other economists and international organizations use similar definitions. Basically, Porter claims that creating self-sustainable individuals in the economy who are expected to build better agents in the economy and a better economy.
The critiques about the GDP calculation system indicate us that the GDP neglects some important factors and variables. Exclusion of these variables damages the power of the GDP to explain socioeconomic development. The GDP is still useful for the investors to make their investment decision; however, the decisions made without considering the neglected variables and factors might cause long term problems. In the short and middle run, the investors might be making the right decision. But the investments will use the natural resources and they will affect our lives. Thus, no one can say that the investors can be free from considering the neglected variables. The neglected variables will be analyzed in the nex sections.
The Neglected Social and Environmental Variables in the GDP Calculation
The GDP is commonly used by the scientists and professionals because of the lack of statistical information as the indicator of financial and social well-being of societies. Production is an important dimension of individuals’ well-being. However, producing is actually destruction of some resources and degenerating some social values and relations. The GDP calculation is done through a national accounting system. This system neglects some variables like environmental variables and social variables.
The simple way to see the insight of this issue is to see how the production destroys the environment and the social values and relations. To produce a product, the companies need to use some social resources. For instance, a beverage producer needs to use water from the nature. That means, this company will open wells close to the production facility. Opening a well is an intervention to the nature. Opening well might change the water streams underground or it might influence some green areas negatively. Thus, while calculating the added value of each soda produced by this company, we need to consider the cost of destruction in the nature. The regular national accounting system considers the value of the soda and maybe it might include the cost of water used in the production. It neglects the negative influence of changing the ways of water streams underground and some other negative influences on the nature.
A social disturbance of the production can be observed in the industrial production. The workers who are willing to work for an industrial company needs to follow some discipline rules. For instance, let us assume that a housewife would like to start working for an industrial company. The woman will enter a stressful work place and high probably she will have stress related and occupational illnesses. The national accounting system will include the wage of this woman; however, it will not include the alternative costs of the woman because she prefers working in an industrial production place.
As can be seen from the examples, the GDP calculation neglects some important costs of production. In the following parts, I will list the neglected costs in the GDP and explain them. The paper will end with a result section. In this section, why the GDP is overrated and how to create better indicators are to be analyzed. Also the limits do not allow us to create better indicators will be mentioned.
The Neglected Costs in the GDP Calculation
The GDP calculation system misses the following main issues: 1) Household production, 2) Underground economy, 3) Leisure time, 4) Quality of time and variety of goods and services 4) Depreciation, 5) Environmental costs, 6) Social costs, and 7) Income inequality. These issues have an important influence on the national economies as well as the workers’ social lives.
As can be seen in the list of the neglected costs, each one has an essential importance on every individual’s life. Excluding these costs means that some people’s problems will be counted in the GDP calculation. Thinking simply indicates what is wrong with the exclusion. When these costs are not counted in the GDP calculation, then some workers’ loss in the economy will be hidden. The state managements can tell a person that you have enough income to survive; thus, you do not need to complain about pollution, inequality and some other issues. Because of the inclusion of these costs in the GDP has an essential importance. In the next section we will go over the main costs neglected in the GDP calculation one by one.
Household Production
Household production mainly means the housewives’ contribution the household economy. As known, in many countries the labor of the housewives is not considered as a part of productions. Similarly, in the less developed and developing countries, the farm workers are mostly family members. These workers are considered employed literally. This situation has economic, social and psychological consequences.
Economically speaking the household production and the production by the unregistered workers are not counted. Therefore, they do not receive any payment regularly and plus they do not have any health insurance provided. Depending on their family income, they might be living their desired life and access to the health services. As a result of not considering the housewives and the farm workers as labor, these people face a huge poverty problem. Finally, the contribution of the labor of the housewives and the family member farm workers to the GDP is not counted.
The housewives and the family member farm workers have a social pressure on them. In another word, being a farm worker or a housewife is not a desired position in the labor market. These jobs are undervalued in the labor market. Therefore, these workers face a high level of stress. Also they will hardly have the ability to make their decisions freely with a low level of income they receive. Consequently, some workers in the economy will be less efficient and less productive. For instance, providing these people with better education opportunities and access to the job market would make them more productive workers.
Considering that many workers in the less and developing countries are employed in these sectors, and then it is easier to understand why the GDP might be adjusted. Their contribution is not included in the GDP calculation. Also their productivity level because of the social acceptance is not explained by the GDP statistics.
Adjusting the GDP with the inclusion of the labor of housewives and family member farm workers might be possible. It is difficult to collect an exact data on this issue; however, it might be possible to develop an estimation model and revise the GDP according to this (Bridgeman et al., 2012).
Underground Production
Underground market is the largest market in the world. Listening to news about smugglers make us realize the volume of the underground market. Even though it is illegal for the people, they might prefer it because of easy money. The state is not aware of the volume of the underground economy. No data exists on the underground economy and it is not possible to set a regular system to generate data. However, the estimations by using the caught illegal trades indicate us that the underground economy might be equal to or maybe more than the legal economy.
In some developed countries, detected illegal income is taxed. Thus, it might be possible to estimate an amount. However, in the developing and less developed countries, it is almost impossible to count the size of the underground market. Also, assuming that the income steaming from the underground economy is stimulating the economy and causing an income cycle in the economy, the national accounting system is certainly biased and we cannot know if this is a systematic bias. Especially, as known, some developing countries’ economies mainly depend on the underground economy. Therefore, while comparing these countries’ economies with the other economies will not give us proper results. Because these countries’ wealth does not appear in the national accounts, even they are richer than the other countries.
Underground economy mostly depends on the illegal trades and production. Therefore, even creating estimation is difficult to include the underground economy in the GDP. However, especially after the global financial crisis, some European countries are considering to broaden the concepts of the GDP to include the underground economy (CCTV America, 2014). Therefore the studies on this might allow us to find a way to include the underground economy in the GDP.
Leisure Time
The GDP neglects the leisure time during which workers refresh and prepare themselves for the next day working. Therefore, the leisure time has a value. However, it is impossible to measure it, because each individual has varying attitude for the leisure time. For instance, one worker might be finding the leisure time more valuable while another might not find it very valuable. Especially, depending on the income level of individuals the value of the leisure time changes. The high income group workers have more leisure time and the marginal utility they receive from the leisure time is relatively less variable. The low income group workers find the leisure time more valuable. There is not certain way of measuring this leisure time.
Quality and Variety of Goods and Services
Quality and variety of products also not reflected to the GDP. Many countries produce the same kind of goods and services. There is no certain information that the same kind of product produced in the different countries has the same value. For instance, many countries produce cheese; however, one developed country produces high quality and a number variety of cheese while one less developed country produce low quality and one kind of cheese. Thus, we cannot assume that the cheese production makes the same amount of contribution to the GDP. To cope with this problem, an input-output matrix might be used in the GDP calculation. Therefore, we can observe the net contribution of goods and services to the GDP. But we know that input-output matrix is difficult to do in many countries because of the lack of data gathering system. Even in some developing countries, the input-output matrix is calculated at five-year intervals. Thus, we cannot make a perfect way of adding this information to the GDP calculation.
Depreciation
The goods and the machinery products produced and used in the countries lose their value in time due to the use of them. Especially, the durable goods are subject to depreciation. They lose value over time and this loss of value is not counted in the GDP calculation. The state can detect the loss of value in the durable goods when a tax is paid on them. The taxation laws in many countries include the depreciation rate. For instance, the tax on the vehicles include a depreciation system; thus, we can observe that the durable goods’ depreciation. However, for many durable goods, there is no way for calculating the depreciation.
Environmental Cost of Production
Each production process uses some natural resources. Also, the production disturbs the nature even though no natural resource is used in the production. Mostly, the producers are not willing to declare how much they damage the nature because revealing this information might increase their cost of production due to an increasing social pressure on them. Or we might not be able to calculate the exact amount of the environmental cost (Hartwick, 1990).
The companies will not confess their sins of polluting the environment. This situation means that the environment will be polluted. When the people are disturbed by the polluted environment, a social strike against the polluters and a fight between the polluters and the society will begin. The proper state intervention might prevent this situation. Convincing the producers and the community to reach a consensus how to finance the cost of environmental pollution is the only solution. Neglecting the cost of the environmental pollution might cause a large bias in the estimation of the GDP.
The developed countries spend effort to get rid of the polluting industries; however, they still need the products of these industries. In this case, they prefer importing them from the developing countries. Even they support this kind of investment in neighbor countries. This strategy might be a solution for the development countries; however, the developing countries are still struggling.
Also, we need to consider the negative side effects of the polluted environment on the social lives of people and people’s productivity. The people living in a polluted environment are less happy and less productive. That means the pollution causes some other costs. Taking the increase in the health care spending due to the pollution into consideration indicates us that the pollution causes a cyclical cost.
The national accounting system neglects the cost of pollution and some other related costs. That means comparing two countries with the same amount of production and with different level of pollution is impossible (Dasgupta, 2001).
Social Cost
The industrial production is the most important component of the GDP. Hence, many governments place an importance on the developing the industrial production. However, the industrial development brings some negative influences on the society. For instance, in the developing countries, the migration occurs from the less industrialized regions to the more industrialized regions. The migration changes the social settings and it causes a number of social issues. This social cost is not included in the GDP calculation (Easterlin, 1974).
Including the quality of life variables such as the number of girls attending the school, people who can have good night sleep, and some other human life related variables can allow us to create a better GDP calculation. Some international organizations and institutes producing statistical information at national level calculate happiness indexes and some other relevant indexes. These indexes can be used to adjust the GDP.
Income Inequality
Income inequality is one of the most important issues that every country faces in the world. Industrialization, the migration from the rural areas to the metropolitan areas and many other relevant factors influence the social settings and the income distribution setting. Depending on countries’ development strategy, governments implement a taxation strategy to influence the income distribution among the people. Although the income inequality is a term that many governments and people seem to fight against, there still exist an income inequality in every country. The income inequality influences people’s productivity at work and their social lives. Thus, we can claim that there exist a social cost of income inequality and this cost is not included in the GDP (Atkinson, 1970).
In many countries, institutes which are responsible for producing and compiling data calculate income inequality and inequality to access to the public services. Also some international organizations create similar indexes to evaluate the countries. These indexes might allow us to create a better GDP calculation.
CONCLUSION
As explained in the previous paragraphs, the GDP calculation neglects many important costs and issues. Thus, the GDP is not an appropriate measure for analyzing a country or comparing countries. Depending on the aim of the analysis needed, the GDP statistics, some other statistics and qualitative information are required to be used. Actually, in the real life, people, business owners, financiers and international organization representatives develop and use more developed indicators. Even observing the varying indicators developed by many organizations prove us that the GDP is not enough by itself.
Even though the GDP neglects many factors, it is still one of the best indicators. Being aware of the neglected variables and factors in the GDP calculation, one can use the GDP statistic to make general analysis about a country.
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