Using GDP as a Measure of Living Standard

Using GDP as a Measure of Living Standard Introduction Real GDP is measure to assess changes in economic welfare over time, to make international comparison of GDP, and for business cycle assessment and forecasting. (Parkin et al 2000). The gross national product (now measured as GDP) was introduced during World War II as a measure of wartime production capacity. Now it is commonly used worldwide as indicator of economic progress (http://www.redefiningprogress.org cited on 1st June 2008). GDP is not accounting Household production, Quality improvement, the underground economy, Health and safety Expectancy, Leisure time, The Environment Quality, Equal wealth Distribution, Political freedom and social justice. GDP can be good indicator of measure of economy living but it is not accurate measure of living standard. â€Å" Improving livings standards is about poor families gaining access to what is available at the time to make comfortable, healthy and rewarding .in the end, economic statistics only measure what they measure, we may not bear much relation to how well off we are.† (The Independent Dec 2002) Source: US department of state (www.usinfo.state.gov cited on 22nd May 2008) Poverty Rising Real GDP is not affecting on the reduction of poverty and change in living standard. USA is the wealthiest country in the world having high real GDP, but more than 35 million people out of 294 million of population faced hunger in 2006 and 390000 in 2005 According to the US Department of agriculture’s household food security report, that 10.4% of all U.S adults and 17.2 percent of all children faced the food insecurity in 2006. (www.ipsnews.net cited on 22nd May 2008) According to survey in 2005, India had population of approx. 1094.6 Millions and Pakistan had population of approx. 155.8 Million. (www.worldbank.org cited 13th May 2008). Real GDP per capita from 2000 2006 Years Data Source: (United Nation, USA 2007 ‘Economic and Social survey of Asia and the pacific 2007’) The real GDP gap between India and Pakistan shows that average Indian people are better being then average Pakistani People. But poverty ratio shows that living standard of India is lower than Pakistan. By comparing India’s population below $1 and poverty line per day with Pakistan shows that living standard of India is not very high than Pakistan because people ratio living below $1 is high that mean they are not using full resources of a happy life. So GDP is not representing the living standard of people and also not counting the poverty ratio. COUNTRY Population Below National Poverty line Per day (%) 1990-2004 Population Below $1 Per day (%) 1990-2005 GDP Per Capita (PPP US $) (2005) CHINA INDIA PAKISTAN SIERRA LEONE NIGERIA ZAMBIA 4.6 28.6 32.6 70.2 34.1 68 9.9 34.3 17 57 70.8 63.8 6757 3452 2370 806 1128 1023 About 10 sub Saharan economies are suffering from malnutrition all the time. (The Observer 18th May 2008) Exchange Rate Inflation It is difficult to compare living standard because exchange rate of country do not show the domestic purchasing power of a currency e.g. any product cost in USA will be 10$ but in China may be 5$. So comparison should consider these. Purchasing power party (PPP) is exchange rates between currencies are in equilibrium and when two countries purchasing power same. Gross domestic products are accounted on standard way based on trade exchange, value of international (dollar) that is purchasing power parity. If the exchange rates of two countries same then the price level will be fixed for both countries products and services. If the domestic price level of any country increase, then exchange rate will be depreciate to return PPP then that country will experience inflation. (www.ftb.bis.gov cited on 27th May 2008) According to World Bank survey (9th April, 2008) on recently increasing the high prices of food will increase the poverty in poor and developing countries. The rise in oil prices changes the each commodity price and result into increase in poverty, the 80% increase in prices of maize and 70% increased in price of rice played main link to increase in poverty. (World Bank 2008) According to head of UN, About 850 million people are facing already the shortage of food and rapidly rising prices could push up to 130 millions population into hunger trap.( Metro 4th June ,2008) so when inflation will increase, it will increase the poverty in poor countries. In Real GDP, increase in price will account as inflation. Quality of Goods GDP is a quantitative measure, and thus does not capture the value of improvements in product quality e.g. $200 dollar phone costs the same as a $200 dollar phone 10 years ago ,it never include the new technology is introduces or quality of goods improved. Unemployment Rising GDP means we are better off, but it is not actually happening. According to recent report by the United Nations Development Programme (UNDP) May, 2008, Turkish youth hit by unemployment. In Turkey 18% of the total population young people aged 15-24, 30% go to school and 30 % work. This means that almost 40% young people have no proper education and/or are unemployed. It also reveals the extreme of sexual discrimination against female. So they are not able to get education because of family pressure. The report says that turkey has achieved continuous high economic growth of the order of 7.5 percent on average during the 2002-2006 periods. That mean turkey has strong economic growth but weaker human development. Turkey economy boosts cause of foreign debts. Economic growth based on foreign capital means that country like Turkey lacks the potential to handle unemployment and other socioeconomic ills. (www.wsws.org cited 16th May 2008). COUNTRY Population Total (millions) 2005 2015 Unemployment Rate Total (% of Labour force) 1996-2005 AUSTRALIA UK CHINA INDIA TURKEY ZAMBIA 20.3 22.4 60.2 62.8 1313.00 – 1388.60 1134.40 1302.50 73 82.1 11.5 13.8 4.9 5 4.2 4.3 9.9 12 Literacy Education is necessary and fundamental part of all societies and globally competitive economies. Education can reduce the poverty and inequality, improving the health precaution, enable the use of new technologies and knowledge. In an increasingly competitive knowledge based surroundings, primary education must be the priority and it leads to higher levels of education (http://ddp-xt.worldbank.org cited by 24th May 2008) Sources: UNESCO Institute for Statistics (UIS), World Bank, UNAIDS, ILO, Household Surveys, IMF, Country. Data are for the most recent year available in 2000-2005. If in a country more people will be literate it will increase the living standard of people and awareness of their rights. Curren( 2003) explained ‘’Illiteracy and other deprivations related to lack of basic education are significant obstacles to essentials of good living such as participation in economic activity, political life and decision making within family’’. Education is important for all age group and gender but some countries gender discrimination is high and woman discourages and their potential is not counted because of discrimination, education expenses, and household duties. In some countries girls are behind the boys in education and health care because of their parent’s discriminations and neglect. So gender inequalities in woman start in early and keep throughout their lives. (www.moe.gov.pk cited on 22nd May 2008). According to World Bank report says that more than 100 million primary school age children remain out of school. Because of poverty, parents concern of safety of their child, lack of school and bad teaching method. (http://ddp-ext.worldbank.org) Country Adult Literacy Rate (% aged 15 and older) 1995- 2005 Combined gross enrolment ratio for Primary, secondary, and tertiary Education (%) 2005 Saudi Arabia China India Pakistan Turkey Nigeria U.A.E 82.9 90.9 61 49.9 87.4 69.1 88.7 76 69.1 63.8 40 68.5 56.2 59.9 Source: Human Development Report 2007/2008 (www.hdrstats.undp.org) Under Ground Economy GDP never count the greatest source of wealth i.e. the household and volunteer work sectors go ignore entirely. GDP is not considering the factor of total production that people hide to avoid taxes because the production and services they are producing are illegal and never comes in GDP. (Parkin el at 2005) The black economy never comes in revenue, i.e. production by labor paid less than minimum wage rate, Labor are paid by giving cash avoid Taxes, unreported self employee, the tips money earned by taxi/cab drivers, waiters in Hotel Restaurants, Smuggling of products e.g. oil, etc. these transactions never comes in the figures for GDP. An estimated 5 to 10% black economy adds to GDP in the United States and the UK and 30% in Italy. In the late 1990s, in Russia estimated 50% black economy adds to GDP(The economist 31st may 2008 ). A lot of Household production carry on in developing countries never comes in economic transactions e.g. grass cutting, child care, embroidery stitching of cloths done by female at home, growing vegetable at home, production of hand made goods etc According to the latest estimate by Economist’s the calculation of the underground economy is to average 15% of national output for developed countries and 33% for developing countries. According to the survey Nigeria and Thailand have the world largest black economies accounting for more than 70% of GDP. (www.tutor2u.net/economics cited on 07th May, 2008). Changes in Leisure Time For the long life and leisure time as if we have more leisure facilities we live better, that never count in GDP. (Parkin el at 2005). GDP only takes the market value of output, therefore, Leisure (paid vacation, holidays, leave time), which shows increase of well-being, satisfaction, and happiness is excluded in the GDP. Different reports have been highlighted that there are longer working hours are in America with compared to Europe which can cause stress and damage family life. European’s have choice for shorter weeks and a longer holiday that will leads to better life and more happiness but not leads to higher GDP as compared to America. Income inequality The GDP only tells how much income we produce but it fails to tell how that income is distributed. So the GDP increases the gap between poor and rich people. The real GDP was the key indicator of measure of national progress. The growth in GDP is offset by increasing inequality, High level of foreign dept, growing costs of unemployment, environment problems, and failure to maintain wealth equality, i.e. in same economy might be one group is using all resources. (Mc Taggart et al 1999). The large portion of financial wealth real GDP per capita goes to small percentage of population. Income and earnings are unequally distributed among the population. Economic growth increasing also accompanied that increasing poverty. ‘If the income is uneven distributed, then increase in income per capita may disproportionately benefit a small group of high income earners and have little impact on reducing poverty. The gini coefficient is used to measure how evenly income is distributed.’ (www.bized.co.uk/virtual cited on 21st May ,2008 The Gini coefficient (An INEQUALITY indicator ) varies from zero, that shows the perfect equailty of income. Latin America is the worlds most unequal region, with a Gini coefficient of around 0.5; in rich countries the figure is closer to 0.3.(The economist 2008). inequalirty will incrase moverty and it will effect to slow down the economic growth cause poor people cannot afford to buy their needs e.g. education,foods etc . The chart below shows that income is more unevenly distributed in Zambia as compared to other countries .so GDP per capita income is fail to count that how income is distributed among the population. Data Source: www.bized.co.uk cite on 21st May 2008 and World Bank development indicator 2007, Washington D.C. (www.hdrstats.undp.org cited on 21st May 2008) Pollution Crime, war, pollution, tobacco smoking, and car accidents all cause people to spend money and so they all increase the GDP. The more trees we fell, fish we catch, fossil fuels we burn, greenhouse gases we emit, the more the GDP increases. (http://www.redefiningprogress.org) Real GDP never count for the quality of life e.g. clean water, life expectancy, leisure time, and it never count for the increase in traffic congestion and loss of open space (www.bos.frb.org cited on 06th May, 2008) The causes to produce environment pollution are the carbon dioxide and Ozone depleting substance use. In china the emission of CO2 and ozone depleting substance use is greater than other developing countries. According to European space agency, Bijing and its surrounded cities have air pollution with the high level of nitrogen dioxide, which is dangerous for lungs. In 2005 when China was hosting for the Olympic Games in Beijing, satellite data has reveals that Beijing as air pollution capital of World. (The Guardian, Monday 31 October, 2005) In an overview of the report of WHO, the cigarette and tobacco product are polluting air as well and is the main cause of death. In 2003, 5 million people died most of in poor and over poor populations. (www.wsws.org cited 22nd May 2008). Data Source: Human development report 2007/2008 www.hrdstats.undp.org cited 5th May 2008) COUNTRY Ozone –depleting Substances use (grams per capita) (2004) CHINA INDIA PAKISTAN AUSTRALIA SINGAPORE IRAN MALAYSIA THAILAND JAPAN 27.1 9.3 10.2 9.5 50.5 89.9 59.2 39.7 15.3 Data Source: (Table: 29 United Nation, ‘Economic and Social survey of Asia and the pacific 2007’) and The World health Organization says that almost 3 million people are died worldwide because of air pollution out door and 1.6 from indoor 80% of illness and death in developing countries because of polluted water.2.1 people die with diarrhea disease. (BBC NEWS www.bbc.co.uk cited on 21/05/2008) The 2nd factor for the human being to live healthy in this world is clean water. In 2004 Romania faced big problem in clean drinking water. Many people became ill because of polluted water. According to WHO/UNICEF (joint monitoring program) in the Romania only 18% of population of the rural had access to clean drinking water (www.ens-newswire.com cited on 22 May 2008). If we see real GDP of Romania in 2004, it comes in high human developed countries but real GDP fail to count the clean water source for the people. In 2004, In comparison with India and Pakistan, the %age of resources using improved drinking water in rural and urban shows that India is behind Pakistan, but if view the economic growth in real GDP shows that India is better than Pakistan. In 2005 in china water pollution increase and 2 million people suffered diseases caused by drinking water with high arsenic content and cancer. In the rural area 360 million peoples faced lack of safe drinking water. The pollution increased 70% in lake and river and sample test. but 95%of water tests were polluted. (BBC NEWS, www.news.bbc.co.uk cited by 23rd May 2008) COUNTRY Share of population with access to improve Water sources (%) (2004) Share of population with access to improve Sanitation (%) (2004) CHINA INDIA PAKISTAN NIGERIA ZAMBIA 77 86 91 48 58 44 33 59 44 55 Data Source: Table- 29 United Nation, ‘Economic and Social survey of Asia and the pacific 2007’ Life expectancy and infant birth morality Good health and long life is the hope of everyone which does not show up in real GDP, at least not directly. (Parkin et al 2000).Increase in Real GDP will spend money on the medical and health safety but it ignore new health and expectancy problem every years e.g diseases i.e. Aids, , drug addiction,, murder and suicide and natural disasters i.e. Earthquake etc. In developing countries, in each year More than 500,000 women die in childbirth. In Asia and Africa, lack of access to trained health staff, modern medical facilities the ratio of maternal death may be more than 100 times higher as compared to woman in Western Europe and North America. (www. worldbank.org cited 22nd May 2008.) According to (WHO) report that in Japan life expectancy is higher. For example a baby born can expect to live 85 years having sufficient needs of life to live happy life e.g. food, vaccination and good education. On average enough funds to spend on medication per year. But in same way its not same situation in Sierra Leone a baby will survive a life expectancy of just 36 years. Due to the non availability of resources one or more of children would die and on average could have enough funds a year to spend on medication. (www.worldbank.org cited on 21st May 2008) According to WHO report (2005), In Nigeria the maternal death rate is 59,000 with the population of 140 Millions. African continent countries are having high maternal death in the world. As compared to India, the maternal death is 117,000 with the population of over billion. According to official US report (2007) says that America has dropped from 11th to 42nd place in 20 years being a richest country in the world. The drop is due to more advance way of lifestyle, health care, and better food in the world i.e. Europe, Japan, Singapore and Jordon whose life expectancy is longer. In US the infant morality 6.8 deaths every 1000 births is also high. The worst life expectancy is figured in Africa that is 34.1 years. (The Guardian, 13th August, 2007) Country Infant mortality rate( per 1000 live births) (2005) Life expectancy at birth (Years) 2005 Male Life expectancy at birth (Years) 2005 Female Australia UK China India Nigeria Sierra Leone 5 5 23 56 100 165 78.5 76.7 71 62.3 46 40.2 83.3 81.2 74.3 65.3 47.1 43.4 (www.worldbank.org cited on 21st May 2008) (United Nation, ‘Economic and Social survey of Asia and the pacific 2007’) In UK, Life expectancy at age 65 reached its highest level for both men and women. Men and women could expect live more 16.9 years and 19.7 years respectively. If mortality rates will be same is in 2004/06. Life expectancy at age 65, United Kingdom At birth Life expectancy has also its highest level for both males and females. Boys and girls born in the UK could expect on average to live to 76.9 years and 81.3 years of age respectively. http://www.statistics.gov.uk cited 17th May 2008 Alternative Indicators The flaws in GDP as a measure of national well-being have generated worldwide moves to develop a better index. Most work is focused on developing the index of sustainable economics welfare (ISEW) also known as the Genuine Progress indicator (GPI).it has been constructed for different countries i.e. US, Germany, Britain, Sweden and Australia. In Australia calculation of GPI shows that GPI was generally less than GDP measure until 1976, it grew at nearly the same rate and from 1976 to 1996 the GPI did not increase.† (Hamilton C. 1997 cited by Mc Taggart et al 1999) In 1995, redefining progress, a non profit public policy organization, based in northern California, introduce a measure of progress that is Genuine Progress Indicator (GPI). GPI basic start with the same accounting framework as the GDP, but then makes some distinctions with same indicators as GDP. GPI counts the beneficial progress as positive and destructive activates as negative. GPI add contribution of household activity volunteer work as hiring some one to do it. but real GDP ignore this contribution that money never change hands, GPI calculate income distribution as GPI will rise when poor receive large portion of income and go down if small portion of income received. GPI subtract these factors that are family break down crime and pollution. In real GDP family break down crime are expenses to addition in well being but GPI minus this cost comes from crime or divorce. Real GDP treats pollution as when it created and when it is clean up that is double gain. But GPI subtract the cost of water and air pollution as damage to human health and environment by increasing the nation wealth people should get the more leisure time and more free time for family or other activities. But the GDP ignores the loss of free time. The GPI goes up if leisure time increases. When people spend money to protect against misfortune or spend for improving their living standard i.e. accidents, drinking water filter, pollution control devices etc the GDP counts as additions but GPI treats these expenses as cost.http://www.redefiningprogress.org cited on 28th May 2008) GDP provides a false sense of progress by comparing with GPI. The chart illutrstae that real (inflation adjusted) US per capita GDP and GPI growth between 1950 and 2004, the GPI figure significantly starggle GDP. It shows that when resource depletion, crime costs, and volounteer sector costs, etc., are accounted for, then the per capita net benefit of a rising GDP is fully invalid. (http://www.redefiningprogress.org cited 2en June 2008) In 1990s United Nations created the human development index (HDI). It Examine that how the people are well being. It shows three indicators that are life expectancy at birth, school and adult literacy and real GNP measure at Purchasing Power Parity in US dollars (The Ledger www.bos.frb.org cited 27th May 2008). Human GDP per capita Development Index PPP US$ 0.70 2600 Tajikistan 0.67 2450 0.64 2300 0.61 2150 0.58 2000 Pakistan 0.55 1850 0.52 1700 0.49 1550 0.46 1400 0.43 1250 0.40 1100 Source: HDI and GDP refer to 2005 as reported in the 2007/2008 Report. (www.hdrstats.undp.org cited on 13th May, 2008) In 2005, HDI highlights the very large gaps in well being and life chances for Pakistan. (Figure 1) It shows that the GDP per Capita was high but the HDI indicator was low showing that people are not well being. The HDI for Pakistan was 0.551 which gives the country 136th rank out of 177 countries. (www.hdrstats.undp.org cited on 13th May, 2008) Conclusion The major disadvantage of Real GDP using as an indicator is a measure of living standard. Real GDP is the good measure on economic growth but it fails to measure that how the people are living and are they happy. It does not true impact that if a country is having high GDP and export 100 percent production will also have high living standard. In the view of replace real GDP with the GPI, as for as west concern it will be very hard for them to adopt this because their concern is to strong the economy and business interest. But economic growth does not bring the happiness. As for as economic growth and living standard of country concern, GPI is good indicator for measuring living standard, but social and non-market costs are included are at dispute. might be thease are the reason GPI has not achieved yet as common usage. Overall, however, the GPI aim is to measure the quality of economic welfare but GDP measure the quantity of economic growth. So GDP is failing to measure the living standard of people it should be replace by GPI. Reference ‘The Ledger’ www.bos.frb.org/education/ledger03/measure.html : Federal Reserve of bank of Boston, (cited 06 May 2008) Parkin M, Powell M. Kent M., ‘Economics’ 6th edition, London: Addison Wesley Publishing, chapter 20 Parkin M, Powell M, Matthews K. (2000) ‘Economics 4th Edition’ Addison Wesley Publishing, p.543-547 McTaggart D., Findly C., Parkin M. 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