The welfare of a nation can scarcely be inferred from a measurement of national income"
Was he correct? Should we be measuring something else? Why do most countries use GDP anyways?
What is GDP?
GDP ( Gross domestic product) is the indicator of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. The calculation of GDP can be done either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent ( expenditure method).
According to the article, it mentioned that the performance of a country's economic can only be measured against the declared objectives of government which include maintain a low rate of inflation, achieve a low level of unemployment, reduce the inequality in the distribution of income, and so on. However, GDP is basically calculated based on national overall income, which is somehow valid in some circumstances. In most country, the distribution of income is not achieved at such the level which the inequality becomes as small as possible. I cannot say "eliminated" because the term itself will never be possible as long as each country never satisfy the full rate of employment. So what? it means that equality will never be met as there's always groups of people who got laid off and find no jobs. So if the welfare of nation can scarcely be inferred from a measurement of national income, the evaluation would be correct in some level if we ignore the inequality still exists. For example, country A represents a good profile in national GDP, so everybody assumes that this country maintain a good economics and the quality of people' lives is pretty high as the GDP which is counted from income results in a high value. However, the assumption is not correct because does everyone contribute the same income equally? No they are not! there are some people manipulates the high range of income while some people are worse off than others, and this creates a gap obviously! My opinion is that GDP does somehow indicate the economic's performance but in a way that not completely correct and satisfied. And also, when it comes to compare the GDP of each country to determine which country is better off or worse off than others. It's getting tricky here as what mentioned in the article in order to do the evaluation, each has to collect the data which somehow differs from one to another. Hence, the data is not quite accurate to measure the evaluation because the background of data does not start with the same point. It can misleading here; as the one who performs less can easily increase its league position, this is the weakness of data.
We should definitely measure something else to make the value more precise, but the problem is that what those would be! When a government tries to improve it economic performance, It tries to support both supply and demand sides. Supply sides may include the prospect of lower inflation, higher rate of employment, faster growth and improvement in international competitiveness. The problem to evaluate this is that these factors would be considered in long term, but mostly the evaluation is done only in short term! ( so economists might consider to evaluate more precisely in long term and result in a more reliable value.) And probably, comparing competitiveness should be taken into account as well.
The reason why most countries continue to use GDP anyway is because that the GDP is a main indicator of economic performance. The case for using this this is based on the idea that the ultimate test of a government's macroeconomic's management is what happens to the living standards of the population. The concept which is hard to defined and measured!
Sources:
http://uplandseconyear12ib.weebly.com/uploads/1/3/4/3/13432222/article-can-economic-performance-be-measured-and-evaluated.pdf
http://www.investopedia.com/ask/answers/199.asp
Was he correct? Should we be measuring something else? Why do most countries use GDP anyways?
What is GDP?
GDP ( Gross domestic product) is the indicator of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. The calculation of GDP can be done either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent ( expenditure method).
According to the article, it mentioned that the performance of a country's economic can only be measured against the declared objectives of government which include maintain a low rate of inflation, achieve a low level of unemployment, reduce the inequality in the distribution of income, and so on. However, GDP is basically calculated based on national overall income, which is somehow valid in some circumstances. In most country, the distribution of income is not achieved at such the level which the inequality becomes as small as possible. I cannot say "eliminated" because the term itself will never be possible as long as each country never satisfy the full rate of employment. So what? it means that equality will never be met as there's always groups of people who got laid off and find no jobs. So if the welfare of nation can scarcely be inferred from a measurement of national income, the evaluation would be correct in some level if we ignore the inequality still exists. For example, country A represents a good profile in national GDP, so everybody assumes that this country maintain a good economics and the quality of people' lives is pretty high as the GDP which is counted from income results in a high value. However, the assumption is not correct because does everyone contribute the same income equally? No they are not! there are some people manipulates the high range of income while some people are worse off than others, and this creates a gap obviously! My opinion is that GDP does somehow indicate the economic's performance but in a way that not completely correct and satisfied. And also, when it comes to compare the GDP of each country to determine which country is better off or worse off than others. It's getting tricky here as what mentioned in the article in order to do the evaluation, each has to collect the data which somehow differs from one to another. Hence, the data is not quite accurate to measure the evaluation because the background of data does not start with the same point. It can misleading here; as the one who performs less can easily increase its league position, this is the weakness of data.
We should definitely measure something else to make the value more precise, but the problem is that what those would be! When a government tries to improve it economic performance, It tries to support both supply and demand sides. Supply sides may include the prospect of lower inflation, higher rate of employment, faster growth and improvement in international competitiveness. The problem to evaluate this is that these factors would be considered in long term, but mostly the evaluation is done only in short term! ( so economists might consider to evaluate more precisely in long term and result in a more reliable value.) And probably, comparing competitiveness should be taken into account as well.
The reason why most countries continue to use GDP anyway is because that the GDP is a main indicator of economic performance. The case for using this this is based on the idea that the ultimate test of a government's macroeconomic's management is what happens to the living standards of the population. The concept which is hard to defined and measured!
Sources:
http://uplandseconyear12ib.weebly.com/uploads/1/3/4/3/13432222/article-can-economic-performance-be-measured-and-evaluated.pdf
http://www.investopedia.com/ask/answers/199.asp