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in each country has its own unique standard of living. For academic and economic purposes it is necessary to measure the standard of living. This helps to form a comparison basis and also to evaluate the progress in the standard of living of the people. The standard of living is directly linked to the economic growth of the nation as a whole. By traditional definitions, economic growth is an increase in national income over a period of time. Although national income does rise every year the rate at which it grows is different for different years and is affected by a variety of factors natural and man made. The most common of measure of the standard of living is ‘gross domestic product’ (hereto referred to as GDP). However a growth in national income does not necessarily mean a better standard of living. The argument for this can be substantiated by observing the fact that economic growth does not always mean economic development for the people. The purpose of this essay is to evaluate the shortcomings of using GDP as a measure of standard of living. First the concept of GDP is explained and then the limitations and alternative measures are discussed.
GDP – FACTORS CONSIDERED GDP is an indicator of the economic activity which includes production and exports of a nation. The most popular view on GDP was put forward by J.M Keynes. The economist has suggested two approaches which are the Demand and Supply Approaches. THE DEMAND APPROACH Keynes argued that national income is the sum effect of the expenditure totals in certain areas by governments. The formula put forward by Keynes is: GDP = C + I + G + (x – m) (Source: www.bos.frb.org) In the above formula ‘C’ stands for increase in consumer expenditure, ‘I’ stands for an increase in investment expenditure and ‘G’ stands for an increase in government expenditure and ‘X’ for export expenditure, ‘M’ stands for import figures. The excess of exports over imports is often seen as a general indicator of economic growth.
Consumer expenditure is the amount the people spend on goods and services. Two important considerations in the calculation of the consumer expenditure are the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). As a matter of national policy it has been suggested by various economists that increasing the propensity to consume will decrease the propensity to save and will therefore increase consumer expenditure. Investment expenditure consists of mainly three factors- private investment, public investment and household investment. The rates of private and public investment depends on subsidies given to businesses and interest rates etc. household investment depends on interest rates on mortgage payments and tax policy. This has a direct impact on the disposable income available to both the individual and also businesses. Government expenditure is mainly composed of spending by central and local authorities on employment and government services. A good example for this in the United Kingdom is the expenditure pattern adopted for the National Health Service- NHS. Expenditure on roads, public transport, defence, police etc are all major factors in this direction.
Export expenditure is influenced by how competitive and modern the industries and companies that are in the export sector are. This is in turn affected by the overall infrastructure in a nation such as reliable goods delivery channels and power supply and political situations. Research and development spending and innovations in goods and services all affect the export arena in the modern business place. THE SUPPLY APPROACH The three main components of the supple approach are Increased Productivity, Technological Progress and Employment patterns. Increased productivity can be related to increase in labour due to decrease in wage rates, capital investment etc. Also prevalent is the increase in land supply. This does not mean a literal increase in the volume of land. The increase in land means a decrease in land prices due to factors such as government subsidies which would allow investment in manufacturing concerns.
Technological progress has the effect of increasing the output for a given industry for a given amount of investment. The rate of technological progress and innovations has a direct impact on the
rate at which output is generated. Advanced machinery helps to produce better products at a faster and more economic rate. This increases the supply figures for the industry. Employment patterns also affect the supply curve. Unemployment benefits along with direct tax policies may increase the incentive of the population to work. This means an increased use of the resources. Also important is the mobility of the work force. Skilled labour may not always be available on site or near the company. Therefore factors such as transport methods such as motorways and fast train services are directly linked to the employment patterns effect on the supply curve. GDP does have advantages in that many nations use it to gauge standard of living and therefore there exists a comparison platform. Also an inherent advantage is the GDP can be measured at basic prices or market prices. The sum total of all the above factors was traditionally used to gauge GDP. The problem with the above factors is that the world ahs changed dramatically and certain new factors such as pollution, natural resource depletion etc has been lately proven to be important in the calculation of a more realistic measure of standard of living.
GDP – INADEQUACIES AS A TRUE MEASURE Accurate reflection of the standard of living is often attained due to the variety of factors involved in the calculation of the standard of living. Through the following points we shall analyse the factors which GDP do not take into account and why it is important to include them to accurately calculate the standard of living. Inflation – Over the years the prices of goods and services have increased and while the increase in production is considered in GDP calculation, prices rises are not incorporated. The effect of inflation is that while the figures go up the actual purchasing power of the individual goes down. In other words national income may seem to rise but the actual standard of living actually is declining or staying still. What a product costed two years ago is not necessarily what it costs today. There are two sides to this coin, for example while transportations costs and consumerables such as food may incur price rises, electronic goods may see price falls depending on level of technological progress in the industry e.g.;- laptops and computer technology.
Distribution of income - Not every region in a country has an even spread of economic prosperity. GDP figures do not represent the distribution of income in a nation and only show an average of the whole nation. In effect this conceals problems such as regional poverty. A good example for this is China. While the GDP of China shows a very good rate of increase, it does not reveal the fact that a vast majority of the rural areas still suffer from poverty and lack of development. Black Economy – The existence of black economies in countries are never revealed through GDP figures. GDP is the representation of the figures that have been reported by the various agencies and government departments. Therefore GDP is often underestimated because of the existence of the black economy and the percentage of the value of transactions that are not officially reported. A Black Economy is the portion of the economy where tax evasion exists. When individuals evade tax the actual value of goods or services rendered are not taken into calculation for GDP purposes. This portion includes product not sold at market prices, barter trade and even self consumption. Black economy in many nations is a very serious fact. For example a recent report by The Economist revealed that countries like Nigeria and Thailand have a black economy worth more than 70% of the official economy. In the
United Kingdom Blackpool in Hull is considered to be the main hub of the black economy. Population Increase – GDP figures can never include the population rise over the years. For example if ten years ago a GDP of 100 GBP was spread over 10 people, now a GDP of 200 GBP would have to be spread over 15 people. This shows a remarkable decline in the amount available to each individual. Factors that affect this are immigration patterns. For example asylum seekers may have to be provided for but do not always contribute to the economy. Quality of Goods and Services – the technology and performance of the products available in the market also has an impact on the standard of living of the people. The best example of this is the rate at which information technology in the form of computers have increased. Every household is now able to access technology which was not available ten years ago, although at that time the GDP figures might have suggested a better standard of living. This misleads the reader of the GDP figures. The quality of the goods and services add to the individual’s quality of life although the figures may not represent these attributes.
Social Welfare – measures undertaken by the government to provide for safer and healthier communities also are a key consideration not included in GDP calculations. For example one of the reasons that the United Kingdom is seen as one of the best countries in terms of standard of living is that it is primarily a welfare state. The government allocates enormous amounts of money towards provisions for clean streets, better healthcare facilities and lately the recycling revolution also has become embedded in the minds of the citizens. In this regard the expenditure on education and public transport is also not fully integrated into the GDP calculations. These are aspects of everyday life that make a remarkable difference in the quality of life in the short as well as long term. The combination of the welfare measures is perhaps equally as important as disposable income because citizens need to feel enriched, secure and committed to the society to have an excellent standard of living. A key factor in the above argument is that the amount spent on welfare measures does not guarantee a higher standard of living. Let us consider two countries A and B. Let us assume that country A has higher GDP than country B and also that country A has a significantly bigger budget for the police department. This, although it adds to the GDP figures, does mean that it is necessary
for country A to have a greater police presence than country B. In such a case it means that the people do not feel as safe in country A as they do in country B. This is a purely qualitative aspect of standard of living that GDP figures cannot reveal. Pollution levels – A factor ignored in the calculation of the standard of living of a people is the environment they live in and the impact of modernisation and economic development. Natural resources are being depleted at a rapid pace and many developing nations have opted for rapid industrial growth at the cost of the natural environment. Clean cities and preserved natural areas contribute significantly to the individual’s well being. Many of the modern day diseases are the result of man made pollution. The biggest cities in the world such as London, New York etc have emphasised the need for green spaces and spend millions on public parks within cities.
ALTERNATIVE MEASURES OF STANDARD OF LIVING So far we have discussed the major shortcomings of using GDP as an accurate representation of the standard of living. From the turn of the century up until the 1970’s GDP would have sufficed because of the relatively lower number of factors that has an effect on the well being of the people. Since the increases in world population, advances in science and globalisation the number of factors have almost quadrupled. Ideally an alternative measure of standard of living would take into account the maximum number of factors that have an economic as well as qualitative impact on the individual standard of living. In the following paragraphs we shall look at the alternative measures put forward by academics in the field. Although the different methods do take additional and/or different factors into its’ calculation we should not forget that when it comes to comparison between countries, cultural differences and religious and political beliefs will always exist and there is no way to homogenise all the people. Also the below list is in no way a conclusive list. For instance a very widely acknowledged concept is that of the Purchasing Power Parity – PPP. The PPP suggests that a dollar should buy the same amount of product everywhere in the world and this would make country wide comparisons easier
and possible. But the PPP again only takes into account the monetary factors and leave no space for inclusion of the qualitative factors of a person’s life. For the purposes of this essay we shall look at the measures which do take into account more than economic aspects. Human Development Index (HDI) – The United Nations Development Program 1999 came up with a new annual report named the HDI. The HDI took into account GDP, life expectancy at birth, education etc. The inclusion of these social factors meant that the HDI gave a better measure of the standard of living. Although not a complete indicator of the true standard of living the HDI is perceived to be better than the GDP. (www.undp.ord) Genuine Progress Indicator (GPI) – A North American public policy organisation based in California called ‘Redefining Progress’ put forward the Genuine Progress Indicator – GPI in 1995. The GPI laid more importance to the qualitative situations in societies. For example where the GDP treated public expenditure on crime prevention as an addition to the standard of living the GPI subtracted these costs in the logic that such costs added to breakdown of the social fabric. A key characteristic of the GPI is that the income disparities in the society are more aptly adjusted for when measuring standard of living in a country. The GPI rises
for a nation when the poorer sections of the society receive a larger section of the national income thus presenting a more accurate and all round picture of the true standard of living conditions. Further advantages of using the GPI is that, where GDP counts pollution as a double gain, once when it is created and then again when it is cleaned up, GPI subtracts the costs of air and water pollution as measured by actual damage to the human well being and also to the natural environment. (www.undp.ord) Index of Social Health – In 1987 Marc Miringoff and Prof. Marque-Luisa Miringoff together developed the Index of Social Health. The Index is published annually using government data for 16 social indicators. The Index uses a scorecard where countries or even states within a country are ranked out of 100. The factors included in the Index shows how important the inclusion of the qualitative factors of life are sometimes more crucial than the mere amount of disposable income. (www.undp.ord)
The Sixteen Indicators in the Index of Social Health 1. Affordable Housing 2. Child poverty 3. Infant mortality 4. Unemployment 5. Age 65 plus poverty 6. Health care coverage
7. Life expectancy 8. Violent crime 9. Alcohol related traffic fatalities 10.High school completion 11.Teenage births 12.Wages 13.Child abuse 14.Inequality in family income 15.Teenage drug abuse 16.Youth suicide
Human Poverty Index (HPI) – the HPI measures the different percentages of people that are not expected to achieve specified target levels of different economic and quality of life indicators. The HPI model includes three separate indicators, P1, P2 and P3. P1 is the percentage of people not expected to survive to age 40. P2 is the percentage of adults who are illiterate. P3 is the percentage of people who fail to attain a decent living standard. P3 is then separated into three separate items which are: P31 - % of people without access to safe water, P32 - % of people without access to health services and P33 - % of people with underweight children, P3 is then calculated as an average of these three items. P3 = (p31+p32+p33)/3 (www.undp.ord)
CONCLUSION In conclusion we can see that the GDP as a measure of true standard of living is grossly inadequate and requires to be combined with others forms of measures which include qualitative aspects as well. With an increased number of factors which affect the well being of the modern citizen it is not realistic to rely solely on measures which are purely economic based. Sustainability issues in an economy also need to be incorporated in to the measure of standard of living. While it is not easy to formulate a platform for this measurement there has to be some sort of parameter where such factors are included. The adoption of alternative measures is complicated because of the inherent nature of changes in technology and cultural inclinations of people in different countries. While the adoption of a combined measure of standard of living may reflect a reasonably accurate picture for a given nation, it is necessary from an academic point of view for there to be a comparison base between countries.
Bibliography 1. Tony Buxton, Paul Chapman and Paul Temple, Britain’s Economic Performance, 2nd edition, 2001 2. David Begg, Economics, 7th edition, 2004 3. Oxford Dictionary of Economics by John Black 4. www.undp.ord/hdr2003/faq.html21Human Development
Report, 2003, FAQ’s on the Human development Indices 5. www.bos.frb.org/genpubs/ledger/ledger03/winter/measure.pdfThe Ledger 2003, ‘’How do we measure standard of living’’?
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