One of the most important factors that is not acknowledged when calculating well-being, is the affects of pollution and natural resource depletion. The land is the most basic foundation for virtually every good produced and needless to say, once all of its raw materials have depleted, the consequences will resound globally and impact the sustainability of growth. A host of other factors, such as hours worked, travel times, public safety, and the quality of public also directly impact living standards. Damage to our environment adversely affects each aspect of well-being: health, happiness and prosperity. We cannot hope to be healthy without clean air and water, nor can we hope to be prosperous without the materials needed to make goods. Unfortunately, GDP actually considers the activities which create pollution as gains to well-being. GDP per capita only includes the monetary value of recorded market transactions involving goods and services. These neglected factors need to be recognized when measuring well-being. Such simple tasks as gardening or enjoying a picnic in the park surely add to well-being, as do the jobs of child-rearing and elder care. In less developed economies there is often a greater proportion of non-market economic activity this fact may lead GNP figures to underestimate the true livings of that country.
The activities that make a community safe and welcoming often do not involve a monetary transaction, and are therefore also are not reflected in GDP. Another example of a factor of well-being that is not currently recorded is the significance of war and violence. Some of the most prosperous times in history have occurred during war and destruction, when innocent men and women were killed daily and the earth was scarred by explosions. The equipment, ammunition, artillery and transport needed to fight a war are all incredibly costly, thus showing a large increase in GDP. How can a society believe this increase to mean a good state of well-being when war, the ultimate cause of widespread misery and destruction, is to thank for the economic gain? As these examples have illustrated, the present technique of measuring well-being by watching gains and losses in GDP, leaves society with a very deluded view of its true state.
The black market also provides a large discrepancy in the values of GDP. The graph below shows that a huge proportion of the ‘official’ economy is unreported. This has the effect of underestimating GDP. There is a great difference in the amount of underground markets across different countries, and this in turn makes it more difficult to compare the calculated GDP’s and the relative standards of living across different countries.
Another problem with GDP is that it is a reflection of the ‘average’ standard of living in a country. The problem that occurs is that the income distribution may be highly unequal, being skewed in the direction of wealthier sections of society. In the case of Singapore and Hong Kong, the GDP per head exceeds that of the UK. However, these are essentially city states with small populations, and therefore a great percentage of income coming from a small percentage of the population would have an effect of raising the average GDP per head. Instead of using the arithmetic mean for GDP per capita, it might be more appropriate to use the median, for which 50% of the population has a higher GDP per capita and 50% has a lower GDP per capita.
The disregard of several influences of standards of living has resulted in a move towards the use of indicators other than the GDP and GNP per capita figure to reflect the ‘true’ standard of living in various countries, using various ‘quality of life’ indicators such as life expectancy and educational opportunities. Two other methods of classification have been put forward by the United Nations, involving a Human Development Index and a Human Poverty Index. It is possible to suggest that GDP could be merged with these other ‘quality of life’ indicators to provide a more accurate value of the standard of living. The HDI is based on three indicators: standard of living, as measured by real GNP per capita, life expectancy at birth, and education attainment, measured as an average of adult literacy. Each of these indicators is then expressed in index form, with a scale set between a minimum value 0, and a maximum of 1. For the standard of living the minimum could be $100 and the maximum $40,000. For life expectancy the minimum could be 25 years and the maximum 85. For educational attainment the minimum would be 0% and the maximum 100%. The index for each of the three is then calculated and an average is found. The closer to 1 the HDI is, the closer the country is to achieving maximum values defined by each of the three indicators. The HDI, by bringing together both economic and quality of life indicators, suggests a greater degree of underdevelopment for some countries than as indicated by economic data alone.
The second classification that has been put forward is the Human Poverty Index (HPI). This method measures different percentages of people that are not expected to achieve specified target levels for different economic and quality of life indicators. The HPI model includes three separate indicators, P1, P2 and P3.
- (P1) percentage of people not expected to survive to age 40
- (P2) percentage of adults who are illiterate
- (P3) percentage of people who fail to attain a ‘decent living standard’.
This last indicator is then separated into three further items.
- (P31) percentage of people without access to safe water.
- (P32) percentage of people without access to health services
- (P33) percentage of people with underweight children
(P3) is then calculated as an average of these separate items.
The Poverty Index is then calculated by the following formula.
The result is displayed in terms of a percentage, the closer to 0% being the smaller the degree of deprivation in terms of the three indicators. The closer to 100%, the greater the degree of deprivation. When looking at the ranking of countries, it can be seen that on occasion the HPI and HDI can differ significantly. It could be said that HDI measures progress for the country as a whole, but the HPI measures the proportions of people in that country who are excluded from that progress.
The Government is expected to shortly publish its new proposals for headline indicators of sustainable development, which consider social and environmental information alongside economic data. These will inform policy decisions and help business and individuals to understand how their own actions might contribute to a more sustainable future. Comparisons of GDP may still be good indicators of some aspects of relative welfare. As we have grown richer, many aspects of our quality of life have improved. For example, hours worked have fallen and standards of health and education have improved, as economies have grown richer. However, the global deterioration of key environmental resources like water and forests, and the growth in pollution, raises important issues for the future sustainability of development. While the number that GDP gives does have weight economically, many other factors contribute greatly to well-being. Less regard should be given to GDP, and a new method of measurement should be developed; one that takes into consideration whether the transactions that GDP records have a positive or negative affect on society’s well-being. A combination of GDP, HDI and HPI might be the most accurate way of taking into account all the factors which affect the standards of living. In conclusion it can be seen that GDP is not a sufficient measure of standards of living, but it is still required in conjunction with other methods of measurement.
Bibliography
Britain’s Economic Performance, Second Edition
Edited by Tony Buxton, Paul Chapman and Paul Temple
Economics, Seventh Edition
By David Begg
Applied Economics, Ninth Edition
Edited by Alan Griffiths and Stuart Wall
Oxford Dictionary of Economics
By John Black
www.archive.official-documents.co.uk
http://econ.ucsc.edu
