Gross Domestic Product (GDP) is one of the most widely used measures of an economy’s output or production. It is defined as the total value of goods and services produced within a country’s borders in a specific time period
Merits of GDP as a tool to measure the economic performance of a nation:
- GDP consists of consumer spending, investment expenditure, government spending, and net exports hence it portrays an all-inclusive picture of an economy because of which it provides an insight to investors which highlights the trend of the economy by comparing GDP levels as an index
- GDP is used as an indicator for most governments and economic decision-makers for planning and policy formulation
- In the case of GDP, each component is given the weight of its relative price. In market economies, it clicks as prices reflect both marginal cost of the producer and marginal utility for the consumer, i.e. people sell at a price that others are willing to pay
- GDP helps the investors to manage their portfolios by providing them with guidance about the state of the economy
- Calculation of GDP provides the general health of the economy. A negative GDP growth portrays bad signals for the economy. Economists analyze GDP to find out whether the economy is in recession, depression or boom
- GDP growth over time enables central banks and policymakers to evaluate whether the economy is in recession or inflation. In that sense, it is still required.
- Also, GDP has held significance as a universal metric over the years.
- The fact that GDP per capita does not fully capture the broader idea of the standard of living has led to a concern that the increases in GDP over time are illusory.
- GDP includes what is spent on environmental protection, healthcare, and education, but it does not include actual levels of environmental cleanliness, health, and learning.
- GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier.
- GDP includes spending on medical care, but it does not address whether life expectancy or infant mortality has risen or fallen.
- Similarly, GDP counts spending on education, but it does not address directly how much of the population can read, write, or do basic mathematics.
- GDP has nothing to say about the level of inequality in society.
- The International Monetary Fund (IMF), Gita Gopinath, raised red flags over the way deflators are being used in India’s growth calculations and the lack of transparency around them.
- Some of the recent approaches have tried to go beyond GDP and incorporate most of these factors into the measurement of the well-being within the society.
- Gini coefficient:
- measures the income inequality among a country’s citizens — but it fails to measure social benefits or interventions that reduce the gap or inequality between rich and poor.
- HDI (Human Development Index)
- overcomes most of the shortcomings of the Gini coefficient and GNH.
- However, HDI, as a measure, falls short in its capture of the unequal distribution of wealth within the country and the level of infrastructural development.
- Many prospects of a healthy society, such as environmental sustainability and personal rights, are not included in HDI.
- It is not successful in tracking the apparent progress of countries, nor is it sufficiently factorized into primary level parameters to indicate many important areas of policy.
- GNH (Gross National Happiness):
- measures the happiness levels of the citizens in a country while it ignores other important elements like gender equality, quality education and good infrastructure.
- After this, Millennium Development Goals and Sustainable Development Goals were also built along various dimensions based on the work done in understanding human development.
- SPI as a complementary index
- It goes beyond the traditional measure of GDP and has most parameters that are required to fulfill SDGs.
- SPI is based on three fundamental pillars:
- basic needs for survival
- access to the building blocks to improve living conditions
- access to opportunity to pursue goals and ambitions.