GDP is an important economic idea; it is often discussed in the media, it is seen in all kinds of textbooks and mentioned by politicians. But what is GDP?
GDP is the market value of all final goods and services produced in a country over a period of time, and GDP per capita is GDP divided by population to find the value per capita.
It is calculated by finding out what households, governments and businesses are spending in the market; after all, what they buy must have been produced by someone.
GDP is excellent for measuring the overall value of goods and services produced in a country and sold in the market. But although it is an amazing measuring device, GDP is often criticized because it only measures overall market activity and does not measure anything that cannot be counted in terms of market prices.
For example, Moore McDowell, Rodney Thom, Ivan Pastine, Robert Frank and Ben Bernanke criticized him in Principles of economics (3rd ed. European, McGraw Hill) for various reasons.
In this article, I intend to explain these reasons from the Austrian point of view. Here are some of the things that GDP doesn’t matter.
Quality of life
GDP is not very effective at measuring quality of life, as it values marketable goods and services and not factors that determine quality of life, such as security, work-life balance, and satisfaction in life. the lives of citizens, all, Organization for Economic Co-operation and Development (OECD), determine the quality of life.
In Figure 1 below, the x-axis is GDP per capita measured in USD and the y-axis is the OECD quality of life ranking (lower is better).
As can be seen, a high GDP per capita does not necessarily imply a better quality of life. For example, Luxembourg has a high GDP, but there are countries like Canada and Norway that have a better quality of life. If GDP measured well-being well, then countries with more GDP per capita would have a better quality of life, which as can be seen from the graph is not.
Indeed, as the philosopher Marc Aurellius wrote, “The happiness of your life depends on the quality of your thoughts.
Even though we do not agree with the OECD ranking, we can nevertheless see how the GDP does not take into account many measures of quality of life, such as personal safety, local climate and other measures.
Economic inequalities and poverty
Another reason GDP is criticized is that while it is great for measuring overall consumption, unless we collect additional data, GDP does not tell us. WHOconsumes all these goods.
A GDP of $ 50,000 does not imply that each citizen consumes $ 50,000 in goods. Half the population could consume $ 80,000 while the other half consume $ 20,000. In France, for example, although disposable income is $ 31,304, the richest 20% of the population earn about four times as much as the poorest 20%.
GDP is not a measure of well-being: things that increase the well-being of consumers that are not sold in the market (i.e. recreation) do not contribute to GDP even though they contribute to our well-being.
Also, GDP growth could result from less free time, as there could be a situation where, in order to increase the goods produced in an economy, workers will have to work more hours.
An increase in GDP will not always trigger the “income effect” of longer leisure hours, because the marginal value of goods in the economy is lower than the marginal value of leisure.
Third, each country takes different leisure time; for example, British workers spend 14.4 hours of free time per day, unlike French workers who spend 16.4 hours of leisure per day.
An increase in GDP is not an increase in economic activity
GDP is derived from what is bought and sold in the market. This means that an increase in GDP does not always mean an increase in economic activity, as economic activity could shift from labor purchased in the market to labor that is not marketed. Let’s illustrate with an example.
Say Robinson Crusoe cleaned his house with his own job. Then one day, Crusoe hired a cleaner to clean the house while he was resting. While there is an increase in GDP equal to what Crusoe paid for cleaning services, as you can clearly see, there has been no increase in economic activity.
In this example, the house cleaning service has just been transferred from Crusoe to the cleaner. In either case, the house will be cleaned by someone.
Data collection is often incomplete
GDP is not always accurate because it does not include unreported income, which ranges from taxi drivers who do not declare their income to the sale of narcotics, because the people who provide these services – whether dealing drugs or delivering pizza – pay a price to report their income, from jail to tax.
The goods and services produced through illegal activities, accounted for through illegal transactions (ie the purchase of narcotics) on the underground economy, as a percentage of GDP, is not a negligible amount. While many may think that number could be small, in regions like Greece, the underground economy is estimated at 21.5% of GDP according to the Institute for Applied Economic Research at the University of Tübingen in Germany.
Furthermore, for a country to have an accurate estimate of GDP, researchers need reliable national income accounts. In less developed countries, with unreliable national income accounts, establishing GDP is often like trying to determine its speed without a speedometer. But even if market activity could be measured, it still wouldn’t tell us anything about the many forms of non-monetary value that affect a person’s quality of life.
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