FACULTY OF BUSINESS, COMMUNICATIONS AND

LAW
(FOBCAL)

COURSEWORK COVER PAGE (INDIVIDUAL)

TO BE COMPLETED BY STUDENTS

FULL NAME and SECTION MATRICULATION NO.

WONG GIN YIN i17013053

COURSE CODE AND ECO 2104

COURSE NAME

LECTURER’S NAME MR GANESH KUMAR SUBRAMANIAM

SECTION / GROUP SESSION MAY 2018

5T1

INDIVIDUAL
COURSEWORK ASSIGNMENT DUE
Week 5
DETAILS DATE
GROSS DOMESTIC PRODUCT (GDP)
1)Explain why we would not be able to compare quality of life among countries by using
GDP.
Nowadays, the more economic and technology develop, the more measures of living standard
are used. The gross domestic product (GDP) is one the primary indicators used to gauge the
health of a country's economy. In addition, Gross domestic product and its related concepts
(such as real GDP, per capita GDP, and per capita real GDP) are incomplete measures of a
country’s standard of living. There are many productive activities that are not included in
GDP because it only measures output produced and sold in legal markets. It does not include
productive activity that does not have a market transaction.

Although GDP and its related concepts are useful in measuring a country’s output, income,
and standard of living, they are not perfect measures of quality of life. Quality of life refers to
the amount of fulfilment people have in life. There are also many aspects of the quality of life
that are not considered in the calculation of output, such as leisure, the environment, and the
quality of people’s health.

On the other hand, there are few factors show that we would not be able to compare
quality of life among countries by using GDP:

1. GDP only measures the output produced and sold in legal markets. It does not include
productive activity that does not have a market transaction.

Example:
According to the chart, the economic activity that is not part of GDP estimates is unpaid
labour, services that people provide for free. The three most important sources of unpaid
labour are professionals, volunteers, and homemakers. For example:

i) Professional:

When a plumber fixes water leak at your house, he charges you money, and that
transaction is considered to be part of your country’s gross domestic product. However,
when he fixes water leak for his family and friends, it is not considered part of the GDP,
even though it is the same mechanic doing the exact same type of work.

ii) Volunteers

The same principle works for volunteers. I know a computer expert who has his own
thriving business. However, in his time off, he works hard maintaining all the computers
for a non-profit organization. Such labour has obvious economic value, but, since no
money changes hands, it is not counted as part of the GDP. Many non-profit
organizations depend on volunteer work for their very existence, and, although such work
has considerable value, it is not counted as part of the GDP.

iii) Homemakers

Think about the massive amount of work done by homemakers for their families. When a
family hiring a lawn service to mow your yard, it’s considered part of GDP. However,
when people devote time and effort to mowing the yard themselves, it is not counted,
even though such labour has significant value.

These unpaid workers culture may affected difference of GDP between different countries
because some country (India, Vietnam) doesn’t have the culture to send their children to
day care centre. Therefore, these countries do not count this activity into their national
income and GDP. However, some countries do. Therefore, GDP measurement is not
accurate to measure quality of life compare to others country.

2) GDP does not measure the quality of the environment.

A country might be able to increase its output (and GDP) if it eases pollution regulations.
Yet, having higher per capita real GDP might not mean people have a better quality of life if
the air, water, and other resources are more polluted. For example, Indonesia is a huge
country compared to Singapore. Singapore has an estimated 5 million people, Indonesia has
252 million. Sure, the GDP of Indonesia is higher, but there are comparing 252 million
people with 5 million people. Indonesia has also the higher GDP per capita compare with
Singapore. However, the living environment of Indonesia is much worse than Singapore.
Indonesia is facing a lot of environment pollution issue such as deforestation; water pollution
from industrial wastes, sewage; air pollution in urban areas; smoke and haze from forest
fires. In addition, the pollution issue in Indonesia is very serious especially the air pollution
problem which is the haze issue is the most serious issue happening in Indonesia every year.
Every year Indonesia sees agriculture fires in Riau province in East Sumatra, South Sumatra,
and parts of Kalimantan on Indonesian Borneo. Moreover, this issue has cause a lot of health
problems happen to the citizen in Indonesia. In addition, the drinking water problems in
Indonesia. Although Indonesia holds six percent of the world’s fresh water resources, the
quality of Indonesia’s public piped water is inadequate (contaminated with E. coli, fecal
coliforms and other pathogens). Moreover, roughly 80 percent of the Indonesian
population lacks access to piped water hence relying on river water for drinking, washing and
bathing. However, the water of most Indonesian rivers does not meet drinking water
requirements. On the other hand, even though Singapore has lower GDP compare with
Indonesia, Singapore has been recognised as the cleanness countries and less pollution
countries in global. Therefore, GDP could not measure the quality of life of a countries due to
it can’t define the quality of environment of a country.

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Picture 1.3 Indonesia air pollution Picture 1.4 Singapore environment

3) GDP does not consider how leisure contributes to the quality of life.
A country could increase its output (and GDP) if its people worked 12 hours per day, seven
days per week. However, having more products might not mean people are better off if they
have no leisure time to enjoy it. For example, China is one of the countries which conduct
largest amount of workforce involve in different industry and most of their working time is
exceed than 11 hours per day and 48 hours per week. Therefore, their economic is growing
higher from year to year then affect their GDP become very high compare with other country.
However, the gap between rich and poor in China is very large. For the peoples who lives in
the urban city such as Shanghai, Beijing enjoying the top living environment and their
average income is very high. Yet, the peoples who lives in the city or rural such as Chengdu,
Shaanxi, Sichuan are living in a poor environment and most of them are involving in
agriculture activity also they have limited education level. Therefore, by concluding all this
data, we can finalize that GDP is only a indicator which can measure the economy power or
status of a country but it can’t use the measure the quality of life in a country.

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Picture1.1 Chengdu Picture 1.2 Shanghai

4) Legal or Illegal Activity?

GDP can’t act as a good measurement to measure the quality of life of the country. In
addition, some countries are legal for the underground activities such as drugs, prostitution
and military. These countries will include the income from this activity into their GDP
therefore their GDP is higher. However, countries that took those black markets activity as
illegal activity doesn’t include the income from the activities into their GDP. For example,
US is the countries which is legal for the military, prostitution and drugs. Citizen in US can
easily get the approval the purchase an arm weapon through getting a licence and also drugs
and prostitution is easily to get in US. However, they have involve all this income from this
activity into their GDP calculation and becoming the most highest GDP country in the global.
On top of that, China is also the country which conduct the largest GDP just behind the US.
However, the black markets activities such as drugs, prostitution and military are all illegal in
Mainland China. Furthermore, in China, selling drugs is a very serious criminal activities,
once get caught, the only punishment is charge to death. Therefore, China doesn’t include
black markets activity in their GDP calculation. In conclusion, GDP is not a good indicators
to measure the quality of life for a country because it doesn’t fair to measuring the difference
of legal or illegal activity between different countries.
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Picture 2.1 charge to death Picture 2.0 drug store in US

selling drugs in China

5) GDP takes no account of income distribution.

By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift
all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of
almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households
increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at
the top as a bounty to all. GDP ignores the drawbacks of living on foreign assets.

In recent years, consumers and government alike have increased their spending by borrowing
from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a
growing burden on our national economy. To the extent that Americans borrow for
consumption rather than for capital investment, they are living beyond their means and
incurring a debt that eventually must be repaid. This downside of borrowing from abroad is
completely ignored in the GDP.

2)If GDP is not the right indicator for quality of life, find one indicator that you think would
fit as an indicator for quality of life and explain them.

GPI (Genuine Progress Indicator) is the better indicator than GDP (Gross Domestic Product)
to fit as an indicator for quality of life.

i) WHAT IS GPI (Genuine Progress Indicator)

A genuine progress indicator (GPI) is a metric used to measure the economic growth of a
country. It is often considered an alternative metric to the more well knowns gross domestic
product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into
account, but adds other figures that represent the cost of the negative effects related to
economic activity (such as the cost of crime, cost of ozone depletion and cost of resource
depletion, among others). The GPI nets the positive and negative results of economic growth
to examine whether or not it has benefited people overall.

Genuine Progress Indicator is an attempt to measure whether the environmental impact and
social costs of economic production and consumption in a country are negative or positive
factors in overall health and well-being.

The GPI metric was developed out of the theories of green economics (which sees the
economic market as a piece within a ecosystem). Proponents of the GPI see it as a better
measure of the sustainability of an economy when compared to the GDP measure. Since
1995, the GPI indicator has grown in stature and is used in Canada and the United States.
However, both these countries still report their economic information in GDP to remain in
line with the more widespread practice.

ii) Calculation of GPI

The calculation methodology of GPI was first adopted to US data in late 1990s. The final
report, with calculation methodology. According to results, the GDP has increased
enormously, but at the same time the GPI has stagnated. Thus, the economic growth in the
USA for example, the growth of GDP has not any more increased the welfare of the people
during last 30 years. Other than that, so far GPI time-series have been calculated to USA and
Australia as well as to several of their states. In addition, GPI has been calculated for Austria,
Canada, Chile, France, Finland, Italy, the Netherlands, Scotland and UK. In addition, GPI has
woken much international interest. It has been seen as measure, which is comprehensive and
better suited to current day societies than GDP.

The calculation formula of GPI (Genuine Progress Indicator) presented in the simplified form
is the following:

GPI = A + B – C – D + I

A=the income weighted private consumption.

B= the value of non-market services generating welfare.

C= private defensive cost of natural detoriaration

D= cost of detoriation of nature and natural resources

I= increase in capital stock and balance of international trade

GPI indicator is based on the concept of sustainable income, presented by economist John
Hicks (1948). In addition, the sustainable income is the amount a person or an economy can
consume during one period without decreasing his or her consumption during the next period.
In the same manner GPI depicts the state of welfare in the society by taking into account the
possibilities to maintain welfare on at least the same level also in the future.

iii) Benefit of GPI (Genuine Progress Indicator) and how better it measure
quality of life compare with GDP

Specifically, the GPI reveals that much of what economists now consider economic growth,
as measured by GDP, is really one of three things:
1) fixing blunders and social decay from the past
2) borrowing resources from the future
3) shifting functions from the community and household realm to that of the monetized
economy.

The GPI strongly suggests that the costs of the nation's current economic trajectory have
begun to outweigh the benefits, leading to growth that is actually uneconomic.

If the mood of the public is any barometer at all, then it would seem that the GPI comes much
closer than the GDP to the economy that Americans actually experience in their daily lives. It
begins to explain why people feel increasingly gloomy despite official claims of economic
progress and growth.

The GPI starts with the same personal consumption data the GDP is based on, but then makes
some crucial distinctions. It adjusts for certain factors such as income distribution and adds
certain others such as the value of household work and volunteer work and subtracts yet
others such as the costs of crime and pollution. Other than that, due to the GDP and the GPI
are both measured in monetary terms, they can be compared on the same scale.
GDP vs GPI

a) Crime & family breakdown

Social breakdown imposes large economic costs on individuals and society, in the form of
legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses
as additions to well-being. By contrast, the GPI subtracts the costs arising from crime and
divorce. Therefore, it’s more accurate to quality of life of a country by using GPI.

b) Household & volunteer work

Much of the most important work in society is done in household and community settings:
childcare, home repairs, volunteer work, and the like. These contributions are ignored in the
GDP because no money changes hands. To correct this mission, the GPI includes among
other things, the value of household work figured at the approximate cost of hiring someone
to do it.

c) Income distribution
A rising tide does not necessarily lift all boats not if the gap between the very rich and
everyone else increases. Both economic theory and common sense tell us that the poor
benefit more from a given increase in their income than do the rich. Accordingly, the GPI
rises when the poor receive a larger percentage of national income and falls when their share
decreases.

d) Resource depletion

If today's economic activity depletes the physical resource base available for tomorrow's, then
it is not really creating well-being; rather, it is just borrowing it from future generations. The
GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or
degradation of wetlands, farmland, and non-renewable minerals (including, oil) as a current
cost.

e) Pollution

The GDP often counts pollution as a double gain; once when it's created, and then again
when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as
measured by actual damage to human health and the environment.

f) Long-term environmental damage

Climate change and the management of nuclear wastes are two long-term costs arising from
the use of fossil fuels and atomic energy. These costs do not show up in ordinary economic
accounts. The same is true of the depletion of stratospheric ozone arising from the use of
chlorofluorocarbons. For this reason, the GPI treats as costs the consumption of certain forms
of energy and of ozone-depleting chemicals.

g) Changes in leisure time

As a nation increases in wealth, people should have increasing latitude to choose between
more work and more free time for family or other activities. In recent years, however, the
opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as
most Americans do -- as something of value. When leisure time increases, the GPI goes up;
when Americans have less of it, the GPI goes down.

h) Defensive expenditures

The GDP counts as additions to well-being the money people spend just to prevent erosion in
their quality of life or to compensate for misfortunes of various kinds. Examples are the
medical and repair bills from automobile accidents, commuting costs, and household
expenditures on pollution control devices such as water filters. The GPI counts such
"defensive" expenditures as most Americans do: as costs rather than as benefits.

i) Life span of consumer durables & public infrastructure

The GDP confuses the value provided by major consumer purchases (e.g., home appliances)
with the amounts Americans spend to buy them. This hides the loss in well- being that results
when products are made to wear out quickly. To overcome this, the GPI treats the money
spent on capital items as a cost, and the value of the service they provide year after year as a
benefit. This applies both to private capital items and to public infrastructure, such as
highways.

j) Dependence on foreign assets

If a nation allows its capital stock to decline, or if it finances its consumption out of borrowed
capital, it is living beyond its means. The GPI counts net additions to the capital stock as
contributions to well-being, and treats money borrowed from abroad as reductions. If the
borrowed money is used for investment, the negative effects are cancelled out. But if the
borrowed money is used to finance consumption, the GPI declines.
Conclusion
In conclusion, both GDP and GPI have a use for economic accounting. GDP is widely
accepted as a measure of economic progress, whilst GPI is an additional measure to give
greater knowledge of real economic welfare development. As a policy, GDP is simpler, and
provides less subjective results unlike GPI which puts a monetary value on normative ideas.

GDP does not provide a complete measure of a nation’s progress. This is because it
undervalues and omits certain provisions in the economy. It is too one-dimensional to provide
a complete measure of a nation’s progress. GDP can be a misleading account of economic
welfare. Therefore, by focussing on a wider measure of economic indicators, GPI encourages
policy makers to think in broader terms of economic welfare.

REFERENCE

What is GDP- internet sources

https://www.thebalance.com/what-is-gdp-definition-of-gross-domestic-product-3306038

https://www.ecnmy.org/learn/your-future/measuring-economies/what-is-gdp/

GDP Limitation and why doesn’t measure quality of life- internet sources

http://econperspectives.blogspot.com/2008/08/limitations-of-using-gdp-as-measure-
of.html

https://www.khanacademy.org/economics-finance-domain/ap-
macroeconomics/economic-iondicators-and-the-business-cycle/limitations-of-
gdp/a/lesson-summary-the-limitations-of-gdp

https://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/limitations-gdp-
alternative.asp

GPI VS GDP (INTRODUCE OF GPI, ADVANTAGES OF GPI, COMPARE GPI AND

GDP)

https://www.investopedia.com/terms/g/gpi.asp

https://www.economicshelp.org/blog/2666/economics/genuine-progress-indicator-gpi-v-
gdp/

https://genuineprogress.wordpress.com/about/