In order to examine economic growth or analyze the wealth of a country, it is necessary to have a way to measure the size of an economy such as Gross Domestic Product (GDP). Economists usually measure the size of an economy by the amount of stuff it produces. This makes sense in a lot of ways, mainly because an economy’s output in a given period of time is equal to the economy’s income, and the economy’s level of income is one of the main determinants of its standard of living and societal welfare. GDP is the most closely watched economic statistic because is it thought to be the best single measure of a social well-being.
The definition of GDP is composed of four parts. Firstly, we have to take into consideration the market value of the products. Froyen (2009) states that in order to gain the market value of the product we have to times the number of products produced the market by the prices they are traded at. For example, each unit of product A is 5$ and product B is 2$ so the market value of 20 product A and 40 product B is 5$x20+2$x40=180$ Secondly, GDP is calculated using the values of the final goods and services and therefore does not take intermediate goods into account. A final good or service is the product brought by the user at its end stage whereas an intermediate good could have gone into the production of a final good. For instance, bread is a final product that it brought by the consumer but flour could have been brought by the producers of the bread in order to make the bread.
Another factors that makes up GDP is that the product has to be made within the confidences of country which is basically summed up by the ‘D’ in GDP. For example, if a Viet Nam retailer manufacturers his products in Viet Nam then it becomes part of VN GDP but if it is produced and sourced from China then it does not. Finally, GDP as measured in a given time period as mentioned earlier which is usually annually or quarterly. GDP can be measured in two ways the expenditure approach which is the total spent on goods and services or the income approach which is the money earned by producing goods and services. This is called the circular flow model of expenditure and income.
Source: N. Gregory Mankiw, Principles of Macroeconomics _ Chapter 10_ Page 197 Another point worth mentioning is social well-being, a state of affairs where the basic needs of the populace are met. This is a society where income levels are high enough to cover basic wants, where there is no poverty, where unemployment is insignificant, where there is easy access to social, medical, and educational services, and where everyone is treated with dignity and consideration. Many attempts have been made to quantify social well-being. The Gross Domestic Product (GDP) of a country is commonly defined as the total market value of all final goods and services produced in a country in a given year. The fact that it is measured regularly and quite consistently in practically all countries of the world allows a direct comparison of the standard of living in individual countries.
The frequent measuring also makes it possible to quickly recognize changing trends. So that GDP can tell us how the country is doing in general, especially when GDP’s are compared between countries. A higher GDP will probably infer that the country is doing better than a country with a lower GDP. It can use to determine whether an economy is growing faster or slower than in the previously measured period and to compare it with other economies in the world. For example, a higher GDP will probably infer that the country is doing better than a country with a lower GDP. As we have seen, GDP measures both the economy’s total income and the economy’s total expenditure on goods and services. Because the production of goods and services indicates that people are working, earning money, and making a living, an increasing GDP shows an increased economic activity, meaning more funds for social programs, and more income that people have to increase their own standard of living. It means that the higher the GDP, the better the economy and, therefore, the better the quality of life.
Nevertheless, the catch is that the high GDP may be from the extremely large profits of a few rich firms, while everyone else is living pretty badly. Therefore, it’s still better to use GDP per capita as a form of comparison. GDP per capita is when they divide the total GDP by the number of people in that country. A rise in GDP per capita will also translate into a rise of productivity. The reason for that is the more you produce, the more you sell. It gives you an idea of what the people are engaged in. GDP per capita can be used as an indicator of standard of living as well. One can conclude that having a higher GDP per capita will be interpreted as having a higher standard of living. GDP per person seems a natural measure of the social well-being of the average individual. However, as a measure of the standard of living in a country, GDP has its limitations and shortcomings. Because of the imperfect of GDP, the first Human Development Report introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the Human Development Index.
The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. But throughout its time in use, the HDI has been criticized for a number of reasons. Although the HDI is a constant measure but it never can take out a whole picture of human development. Some of the questions to be posed to the HDI index is: this is the measurement of the standard of living of standards or measure the level of living? Or it measures the quality of life? There are only three dimensional edges are measured in the HDI: health, academic and living standard. In addition to this, it has a profound distinction of HDI between countries and regions in the world. For example, some countries have the same HDI but theirs income level are quite difference. GDP is not, though, a perfect measure of social well-being. Some things that contribute to a good life are left out of GDP. But it’s still a good measure.
Although it doesn’t say much about the individual’s well-being, education, health,… , it does help economists understand how the country is doing. If a country has a thriving GDP then they are sure to be wealthy and with wealth comes better tech medicine and opportunities to the citizens of the nation. While GDP may not indicate the quality of life of any one person, it is quite obvious that countries with a higher GDP than others have much better quality of life across the board. GDP growth can indicate a strengthening economy, more jobs, and as a result, more income for individuals. If each person is making a significant amount of money in relation to where they live and cost of living then in theory they should lead a better standard of living. They would not have the financial burden which causes so much stress in today’s world. For instance, G. Gregory Mankiw examined international data1: Country
Real GDP per Person (2007)
Life Expectancy
Adult Literacy
(% of population)
Internet Usage (% of population)
United States
$45.592
79 years
99%
63%
Germany
34.401
80
99
45
Japan
33.632
83
99
67
Russia
14.690
66
99
15
Mexico
14.104
76
93
18
Brazil
9.567
72
90
19
China
5.383
73
93
9
Indonesia
3.843
71
92
7
India
2.753
63
66
3
Pakistan
2.496
66
54
7
Nigeria
1.969
48
72
4
Bangladesh
1.241
66
54
0.3
Source: Human Development Report 2009, United Nations. Date on real GDP, life expectancy, and literacy are for 2007. Dara on internet use is for 2005.
