Where consumption has increased due to investment in a particular area such as education health, the insufficiency of certain factors within the sector can mean that the society’s net benefit will not have increased. We have seen this before in education, where corrupt members of staff have simply stole money from schools. In the health sector, the government in the UK had recently spent millions on a campaign trying to cut down on obesity within school children. We have seen significant changes in school dinners and the amount of sugary foods available to children during school hours, but this is all near useless when we see parents passing on chips through the school gates and children getting whatever they want at home.
The GDP statistics disregards externalities. The Paretian criterion, found on page 1 of Economic Development, Technological Change, and Growth by Paul Auerbach, is defined as ‘Economic growth takes place in a society only when at least one member of the society is made better off (by his or her own reckoning) and none made worse off.’ These externalities come in many forms. One of the most obvious of these is the environmental side effects of increased consumption. As consumption increases, the pollution levels are likely to increase and the threat of global warming is greater. As it is difficult to measure the level of pollution, it would be hard just to re-calculate the GDP so it takes notice of the environmental costs. The environment affects everyone in the society, so this goes against the Paretian criterion and hence, we cannot say that a rise in GDP means the society is better off than before. There is also the problem of the non-renewable resources of the world being used to rapidly. A rise in production could well mean using greater amount of resources, and if there are not alternative resources found, the future generations could find themselves with serious problems.
There is also the problem of the human capital being worn out. If production increases due to humans working harder and longer rather than technological improvements, the net benefit for the workers will be less. The Industrial revolution in Great Britain meant much higher production, but also meant a great setback for the human capital. This is a problem particularly in industry and agriculture. When there are increases in GDP due to developments in these areas, it is likely that it overestimates the true growth. There is no deduction in the calculation of national income for the human costs of production, and therefore is not reliable for measuring a society’s well being.
It is often claimed that an extreme search for economic growth by a country can lead to a more greedy and selfish society. And this can lead to violent crime, stress and other social problems. Ironically, these things can also lead to an increase in GDP. If there is increased crime in a society, people are likely to spend more on security and an increase in stress related issues can lead to increased spending on healthcare. We can see that these things can actually lead to an increase in GDP, but they definitely do not benefit the society, so again this is a reason why national income can be deceptive as indications of material prosperity.
While national income rises, it is very likely in some countries that the gap between the richest and poorest widens. This is a problem in most of the developing countries such as Brazil, where the richest live a life of luxury, but the majority of the population live a life of crime and struggle. According to the paretian criterion, this growing inequality means no economic growth. In countries where this situation is not desired (which is most of the world), GDP is not a suitable statistic for the measure of welfare.
Economic growth can involve changes in production, particularly in terms of technology. So when there are periods of rapid growth, there may be rapid changes in technology. Some firms may find it more efficient to replace some employees with advanced machines and a lot of people could find themselves unemployed or in less paid work. This definitely will not benefit the society.
The problem of irreversibility’s is one more way in which rises in national income is not matched with the same rise in economic growth. This is a major problem in terms of the environment. For example, when the new terminal 5 at Heathrow airport is built, we may later find out that the increased level of pollution and congestion is too much for the society. However, the terminal cannot simply be shut down because there has been a lot of investment for it and the investors will not give up their investments so easily. So the future generations could face some problems.
It is sometimes true that for growth to be achieved there may have to be a decrease in national income. If a firm wants to grow, it needs to invest. This means being more efficient with costs and saving money, which means less consumption. Therefore, a decline in national income can mean a better standard of life for the society.
We can conclude that each country has its own aims for economic growth. Some countries could have a high priority on achieving greater equality and keeping the environment healthy for the future. Such countries will probably benefit with lower GDP. Other countries may have priorities in terms of greater wealth, which would probably mean that they would benefit with a higher GDP. Therefore we should not use national income to measure material prosperity because it can be very deceptive. However we should take into account that GDP is only meant to measure output, so we should not see it as useless.
Bibliography
Auerbach, P, 2006. Economic Development, Technologiacal Change and Growth
Sloman, J, 2005. Economics. Fifth Edition.