Green University of Bangladesh

Assignment
Topic: Critically Evaluate GDP as a measure of Economic
Growth

HUM 207
Course Title: Engineering Economics

Date Of Submission: 07/09/2021

 Submitted By

Name: Md Moinul Alom Shovon

ID: 201001115
Depertment: EEE
Section: DC
Batch: 201

Submitted to:
Md. Mahmud Wahid
Assistant Proffesor & Co-ordinator(BBA)
Green Business School,GBS
Green University of Bangladesh
Gross domestic product (GDP) is the value of the goods and services produced
by the nation’s economy less the value of the goods and services used up in
production. GDP is also equal to the sum of personal consumption
expenditures, gross private domestic investment, net exports of goods and
services, and government consumption expenditures and gross investment.
Economic growth assesses the expansion of a country’s economy. Today, it is most
popularly measured by policymaker and academics alike by increasing gross
domestic product, or GDP. This indicator estimates the value added in a country
which is the total value of all goods and services produced in a country minus the
value of the goods and services needed to produce them. It is common to divide
this indicator by a country’s population to better gauge how productive and
developed an economy is – the GDP per capita.
The idea of economic growth stems from classical economics where growth in
national income represents the growth in the wealth of a nation – the classical
hallmark of success. The concept of economic growth gained popularity during the
industrial revolution, when market economies flourished. Today, the predominance
of GDP as a measure of economic growth is partly because it is easier to quantify
the production of goods and services than a multi-dimensional index can measure
other welfare achievements. Precisely because of this, GDP is not, on its own, an
adequate gauge of a country’s development. Development is a multi-dimensional
concept, which includes not only an economic dimension, but also involves social,
environmental, and emotional dimensions. An increasing GDP is often seen as a
measure of welfare and economic success. However, it fails to account for the
multi-dimensional nature of development or the inherent short-comings of
capitalism, which tends to concentrate income and, thus, power.

Economic growth versus development

There are three main explanations why countries underperform in relation to the size
of their economies:
1. They have a sizeable contingent of poor people,
2. Wealth and income inequality is high and/or growing, and
3. Environmental degradation has not been properly addressed.
Although the third is captured by the SPI, the two former explanations are not.
Poverty and inequality are increasingly being debated in academic literature, not only
due to their negative impacts on human development, but because they drag GDP
growth.
Economic growth, measured popularly via GDP, is a complementary indicator to
development, but not an adequate indicator when considered on its own. The
challenge of modern capitalism is to balance its role as an efficient and effective mode
of production with its tendency to concentrate income, wealth and, thus, power. In
fact, social progress will lead to economic progress and that is where the SPI is a
welcome improvement to development metrics.
The measurement of GDP could also be made more robust if it captured, not only
physical capital, but also natural and human capital. When dissociated from social
progress, economic growth in its pure accounting format (GDP expansion) will
inevitably result in less inclusivity and a generalized sense of social discontent,
pernicious in democratic societies.
Therefore, the current measure of economic growth as GDP has many limitations
when used to assess development. Given the multi-dimensional nature of
development, the SPI can be seen as a more adequate indicator.
The limitations of GDP
GDP is a useful indicator of a nation’s economic performance, and it is the most
commonly used measure of well-being. However, it has some important
limitations, including:

o The exclusion of non-market transactions

o The failure to account for or represent the degree of income inequality in
society
o The failure to indicate whether the nation’s rate of growth is sustainable or
not
o The failure to account for the costs imposed on human health and the
environment of negative externalities arising from the production or
consumption of the nation’s output
 o Treating the replacement of depreciated capital, the same as the creation of
new capital.

Is GDP the true measure of welfare?

It’s definitely not. GDP is the measure of total value added an economy produces,
which does not include distributional concerns. No serious economic analysis uses
GDP as a measure of welfare. Instead, economists use something called utility
function. Mathematical details aside, utility functions take into account inequality
in the economy. One important example is international trade. Standard models
show that free trade increases GDP. Still, these models are silent about the welfare
consequences. Free trade creates winners and losers. Winners win more than losers
lose so overall GDP increases. However, increased inequality might lead to overall
lower welfare.

At the end of this discussion, we can say that GDP is the final output of a country.
GDP indicate the strength of a country in its production of goods and services.
However, higher GDP does not necessarily mean that the citizens are happy and
well to do. Measuring Human Development Index (HDI) is a much better option
than GDP.
Social welfare is a different ball game altogether. It depends on the Government
policy and interventions wherein Government takes care of public Health, their
accommodation and so on. Higher GDP and higher per capita income can support
the Government to go for a welfare society. Welfare does come with higher cost
and Government has to take care of the cost. Only higher GDP Relative to the
population can support welfare society.