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Gross Domestic Product vs Human Development Index

What is progress if we cannot measure it? How do we know we are better off than a year ago if we do not have the standards to quantify our improvement? Do we share a common definition of progress? One person may define progress by the increase in his material wealth. To another, the attainment of a college degree or maintaining a healthy well-being may be more important. These are some of the many questions that emphasize the importance of measuring standard of living.

In the early 1930s, economist Simon Kuznets developed one such measurement - the Gross Domestic Product (GDP). This measures the size of an economy by adding up the value of goods and services produced within the country during a period of time. Using the expenditure approach, GDP is equal to Consumption + Gross Investment + Government Spending + (exports - imports), or, GDP = C + I + G + (X-M).

Most countries use GDP to measure standard of living. Economists, policymakers, international development agencies and even the media use it as an indicator of the economic health of a nation. The advantages offered by GDP is that it is widely and frequently used and its data requirements are readily available. Since the definition is common among countries, consistent comparisons can be made between and among them.

Let us have a look at GDP figures for 2006. The figures show that the United States leads nations with a GDP of $13.2 trillion (current U.S. Dollars). Japan follows next with $4.34 trillion, Germany with $2.9 trillion and China with $2.6 trillion.

The countries at the top of the list take the lead in terms of total economic activity taking place within their boundaries. However, it does not necessarily mean that their citizens are better off than the rest of the world in terms of overall well-being. Take for instance, the US - its GDP includes activities considered detrimental to humans and the environment. Of its total GDP in 2006, about $229 billion were for mining-related activities including oil extraction. Another example - China was the world's number one emitter of toxic carbon dioxide during that year - a result of its high level of manufacturing and industry-related activities. While this contributed to a high GDP for China, many of the Chinese people had to suffer living and working in a polluted environment.

The examples above show some of the limitations and disadvantages of GDP. Certain activities that have a negative impact on the people's well-being could end up being recorded as positive contributions to the GDP. Take for instance, crime. Rising criminal activities can increase the country's GDP through greater expenditures toward maintaining law and order (e.g., hiring of additional police members, purchase of guns, prisons, etc). Another example is the consequence of having depleted forests because of logging activities. GDP is increased when trees are cut down for lumber and other uses. The negative impact of deforestation is not taken into consideration. A further example is divorce. As divorce rates increase, so too does the related spending on litigation, lawyers' fees and the establishment of separate households. The emotional and psychological impact of divorce on the individuals concerned are not considered.

GDP is also criticized because it does not take into consideration other aspects that define human well-being like life expectancy and educational attainment.

It is for these reasons that alternative ways of measuring standard of living have emerged. One of these is the Human Development Index or HDI. Developed by the United Nations, HDI takes into account GDP and adds other factors to measure other aspects of human development: knowledge, longevity and decent standard of living. The main indicators used are life expectancy, adult literacy rate and gross enrollment ratio and per capita GDP. HDI index values range from 0 to 1. Those countries with an HDI of over 0.800 are part of the High Human Development group. Those between 0.500 and 0.800, are considered as Medium Human Development countries. And, those that fall below 0.500 are the Low Human Development countries.

Based on 2006 HDI figures, Norway has the highest HDI at 0.963, Iceland is second with 0.956, Australia third with 0.955 and Canada, Luxembourg and Sweden tied at fourth with each having an index of 0.949. Niger is dead last in the list with an HDI of only 0.281.

Because HDI is comparatively more comprehensive than GDP, those countries that ranked high in GDP are ranked lower. The U.S. is only ranked no. 10, Japan is no. 11, Germany is no. 20 and China is no. 85. The inclusion of other indicators in HDI allows it to give a better picture of the state of well-being of a country's populace. For example, people in Norway live a longer life than those in the U.S. Norway's life expectancy at birth in 2006 was 82.9 years. By comparison, U.S. life expectancy was only at only at 77.7.

The HDI, however, has its share of critics. Some point out that it is difficult to chart a country's growth using HDI because a country's rank for a certain year is calculated based on, for example, the life expectancy or adult literacy rate of the other nations in the list. There are also others who say that HDI does not capture the moral and spiritual aspects of human development. For example, the HDI does not penalise countries with a high suicide rate.


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