Tuesday, February 14, 2006

GDP vs happiness index


I was struck by an index they seem to use in Bhutan called the 'happiness index'" . I suppose it stems from a strong Buddhist tradition. One can say it is a 'flawed' measure for it conveys 'nothing' that can be used as basis of planning., or resources allocation etc. But then one can say the same for other measures such as GDP which we all love to gobble up.

Why I say that is the GDP measure too is somewhat flawed .There are many other parameters of economic welfare that are not included in the GDP. Because these are omitted from the overcall contribution to national welfare they may understate the extent of the true well being of a country. Some of these are :

- the work that people in households do. This is not included as part of market transactions and is treated as Zero for purposes of GDP calculation

- sometimes GDP over adjusts for inflation. When we over estimate the rise in prices we may understate the extent of the increase in physical production.

-many economies have large amounts of ‘illegal’ activities which are not included in the GDP..India has a parallel economy almost

-qualitative factors such as the quality of social benefit, healthcare, education etc. are not included in the calculation of GDP. Another Thing that does not show up in GDP is leisure time. These improvements in life quality for an entire society do not show up in GDP calculations and may bias the GDP calculations downwards.I guess Bhutanese people may agree here with me ..tee heee

-developed countries are beginning to accord significant resources to maintain the environment, enhance safety standards and pay a high social costs. This investment ( or the pernicious effects of the lack of them) do not show up in GDP

I am struck that despite these shortcomings GDP remains as the most attainable compromise measure to reflect the overall degree of economic development in a nation. I guess it gives a good sense of changes in the business cycle – and measuring that relative change is important for policy makers.

Fluctuations in real GDP tell a lot about how the factors of production have been used, the state of unemployment and in general the overall health of an economy.But ofcourse GDP is not a measure of welfare of a society or its people. (it values a dollar spent on education the same as a dollar spent on alcohol.) Instead it provides the information needed to track the performance of the economy. Without this information, policy makers would not be able to adopt corrective economic activities.

So I cna live with GDP but i see more informational content in GDP changes than the absolute figure itself.


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