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It is not an easy task to gauge the progress of a nation based on its well-being, but there are techniques that are nevertheless used. Economists frequently make use of the model of gross-national product (GNP) or gross domestic product (GDP). GDP and GDP per head are widely used as abstract indicators of the discrepancies in the standard of living between countries. GDP is an indicator of market traded production or economic activity. The level of production determines the quantity of goods and services a country can afford to consume, which is one of the most important factors influencing living standards.
In recent years the use of GDP has been criticized, and does have many flaws in that it does not account for many things which greatly influence the standard of living in society like unpaid domestic labour in raising children and other household services. GDP can be calculated in a number of ways: Alternatively GDP can be measured as the sum of all factor incomes in the economy. GDP may also be measured as the total value added by each firm and govt. department in the economy. GDP can be measured at basic prices or at market prices.
GDP does have its advantages in that it is universally used, and therefore makes it easy to compare the GDP of different countries quite easily using numerical values. Despite some of the advantages, there are also disadvantages. One discrepancy which occurs in the use of GDP is in the conversion of local currency into the $ equivalent using the official exchange rate may misrepresent the actual purchasing power in the local economy because of complex forces in foreign exchange markets. A more accurate method of conversion lies in the use of purchasing power parities (PPPs).
PPPs measure how many units of one country’s currency are needed to buy exactly the same basket of goods with a given amount of another country’s currency. One of the most important factors that is not acknowledged when calculating well-being, is the affects of pollution and natural resource depletion. The land is the most basic foundation for virtually every good produced and needless to say, once all of its raw materials have depleted, the consequences will resound globally and impact the sustainability of growth.
A host of other factors, such as hours worked, travel times, public safety, and the quality of public also directly impact living standards. Damage to our environment adversely affects each aspect of well-being: health, happiness and prosperity. We cannot hope to be healthy without clean air and water, nor can we hope to be prosperous without the materials needed to make goods. Unfortunately, GDP actually considers the activities which create pollution as gains to well-being. GDP per capita only includes the monetary value of recorded market transactions involving goods and services.
These neglected factors need to be recognized when measuring well-being. Such simple tasks as gardening or enjoying a picnic in the park surely add to well-being, as do the jobs of child-rearing and elder care. In less developed economies there is often a greater proportion of non-market economic activity this fact may lead GNP figures to underestimate the true livings of that country. The activities that make a community safe and welcoming often do not involve a monetary transaction, and are therefore also are not reflected in GDP.
Another example of a factor of well-being that is not currently recorded is the significance of war and violence. Some of the most prosperous times in history have occurred during war and destruction, when innocent men and women were killed daily and the earth was scarred by explosions. The equipment, ammunition, artillery and transport needed to fight a war are all incredibly costly, thus showing a large increase in GDP. How can a society believe this increase to mean a good state of well-being when war, the ultimate cause of widespread misery and destruction, is to thank for the economic gain?
As these examples have illustrated, the present technique of measuring well-being by watching gains and losses in GDP, leaves society with a very deluded view of its true state. The black market also provides a large discrepancy in the values of GDP. The graph below shows that a huge proportion of the ‘official’ economy is unreported. This has the effect of underestimating GDP. There is a great difference in the amount of underground markets across different countries, and this in turn makes it more difficult to compare the calculated GDP’s and the relative standards of living across different countries.