gdp vs. hdi

FOREIGN TRADE UNIVERSITYFOREIGN TRADE UNIVERSITY

GDP vs. HDIGDP vs. HDIEndless Efforts to Measure SocialEndless Efforts to Measure Social

Well-BeingWell-Being

Student’s Name: Vu Thi Ngoc Thoa

Student’s ID Number: 1113340224

Class: A18 – CLC TCNH – K50

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Vu Thi Ngoc Thoa A18 – CLC TCNH – K50

Hanoi, November 2012

TABLE OF CONTENTSTABLE OF CONTENTS

Introduction 3

GDP: General Facts 4

The Birth and Use of the HDI 6

Reading Between the Numbers 8

Conclusion 11

References 12

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INTRODUCTIONINTRODUCTION

Social well-being has always been an issue concerning most governments in

the world. Organisations such as the World Bank or the United Nations periodically

publish rankings of nations in terms of living standards, education, health care and

so forth.

Gross Domestic Product (GDP) is one of the most commonly used indicators

of well-being. It is easy to see that countries with high income are more capable of

investing properly in social development projects to ensure high living standards

for their citizens.

However, in 1990, the Human Development Index (HDI) came into

existence and soon became more and more widely accepted as an indicator of

well-being. This index is formed not only from income but also from education and

health care levels; accordingly, it is considered to be more comprehensive than the

GDP and to reflect more aspects that influence life quality of a country’s citizens.

This essay will go through some very basic points about the two indicators

and make a brief comparison between the two subjectively.

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GDP: GENERAL FACTSGDP: GENERAL FACTS

What is GDP?

Gross Domestic Product (GDP) is the market value of all final goods and

services produced within a country in a given period of time1. The market value of a

good or service is the price at which it is traded in the market. Every dollar that the

buyer spends on a good or service is a dollar of income to the seller of that good or

service. Accordingly, the GDP measures not only the expenditure but also the

income of a country.

Components of GDP

Why is the GDP an indicator of social well-being?

From the definition above, it is apparent that the GDP is undoubtedly a

significant element affecting social well-being. The GDP is well connected with a

country’s wealth, which decides the level of material satisfaction of its citizens.

1 Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage Learning, United States of America, p.198.

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From the side of production: because the GDP measures the value of all

final goods and services sold in the market, a country with a higher GDP

produces goods and services in larger quantities or with better qualities

to meet the needs of its citizens.

From the side of consumption: citizens of a country with a higher GDP are

able to purchase more and better goods and services as they have more

money in hand for consumption or savings to enjoy future consumption.

A high GDP brings people not only material satisfaction to people but

spiritual values as well. A family with a high income is able to pay for high-quality

education and health care, spend holidays abroad, purchase houses in safe and

unpolluted areas and so forth.

Below are three examples of countries with their nominal GDP and rankings

in 2011. Average citizens in these countries enjoy different standards of living

corresponding to their income.

Countries United States Costa Rica Tonga

GDP (2011) 15,094,000,000,000 41,006,959,585 435,589,200

Rank 1 83 184

(Source: World Bank)

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THE BIRTH AND USE OF HDITHE BIRTH AND USE OF HDI

What is HDI?

The Human Development Index (commonly abbreviated HDI) is a summary

of human development around the world and implies whether a country is

developed, still developing, or underdeveloped based on factors such as life

expectancy, education, literacy and GNI (Gross National Income) per capita. Since

1990, the results of the HDI have been published in the annual Human

Development Report, which is commissioned by the United Nations Development

Program (UNDP) and is written by scholars who study world development and

members of the Human Development Report Office of the UNDP2.

Components of the HDI (Source: UNDP)

As seen on the chart above, the HDI is a combination of several indicators

which measure social well-being; thus, it is said to reflect not only social wealth but

also other human development aspects.

2 About.com Geography, HDI – The Human Development Index.

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How does the HDI represent the level of social well-being?

Today, the HDI examines three basic dimensions to measure a country’s

growth and achievements in human development. The first of these is people’s

health. This is measured by life expectancy at birth and those with higher life

expectancy rank higher than those with lower life expectancy. The second

dimension measured in the HDI is a country’s overall knowledge level as measured

by the adult literacy rate combined with the gross enrolment ratios of students in

primary school through the college level. The third and final dimension in the HDI is

a country’s standard of living. Those with higher standards of living rank higher

than those with lower standards of living. This dimension is measured with GDP per

capita in purchasing power parity terms.

HDI values range from 0 to 1. Those countries with an HDI of over 0.800 are

part of the Very High Human Development group. Those between 0.700 and 0.800

are considered as High Human Development countries. Medium Human

Development countries include those with the HDI varying from 0.500 to 0.700.

Those that fall below 0.500 are the Low Human Development countries.

Below are some examples of countries with different levels of human

development as measured by the HDI.

Countries Netherlands Russia Vietnam Haiti

HDI (2011) 0.910 0.755 0.593 0.454

Rank 3 66 128 158

Group Very High High Medium Low

(Source: UNDP)

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READING BETWEEN THE NUMBERSREADING BETWEEN THE NUMBERS

It is clear that income is one component of the HDI. While the GDP only

shows the scale of an economy, the HDI gives a multi-dimensional insight into the

country’s development, both economic and social.

GDPGDP HDIHDI

1 Fails to reflect income per capita, affected by population

Adjusted for population’s effect (using GNI per capita)

2 Solely indicates economic power of a country

Takes social development indices into account

3 Does not reflect social inequality Partly reflects social equality or inequality

4 Is sometimes misleading as a contributor to well-being

Is strongly correlated to the level of well-being

1. This is relatively simple. The GDP does show the scale of an economy, but

fails to indicate the income per capita, which is an important determinant of well-

being. Consider this as an example (data from Word Bank and UNDP):

Countries China Switzerland

GDP in USD (2011) 7,318,499,269,769 635,650,112,360

Population (2011) 1,344,130,000 7,907,000

GDP per capita in USD (2011) 5,445 80,391

HDI (2011) 0.687 0.903

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As seen in the table, although China’s GDP is more than eleven times as high

as Switzerland’s GDP, its GDP per capita and HDI are incomparable to Switzerland’s.

In this case, the GDP fails to portray the actual standard of living, conflicting with

the indication of GDP per capita and the HDI.

2. The GDP is a measurement of a country’s income, but the HDI means

more than that. It is an integration of economic and social indices, i.e. GNI per

capita, life expectancy and mean years of schooling. Income is no doubt an

important determinant of well-being; however, two countries with similar GDP and

population could probably show differences in the level of well-being, depending

on the effectiveness and efficiency of how governments use national income to

enhance the standard of living. Good socio-economic policies will make good use of

available resources to boost up the standard of living, while ineffective ones may

fail to improve social well-being though supported with favourable economic

conditions.

Robert Kennedy once said when running for president in 1968 that GDP

“does not allow for the health of our children, the quality of their education, or the

joy of their play. It does not include the beauty of our poetry or the strength of our

marriages, the intelligence of our public debate or the integrity of our public

officials. It measures neither our courage, nor our wisdom, nor our devotion to our

country. It measures everything, in short, except that which makes life worthwhile,

and it can tell us everything about America except why we are proud that we are

Americans.”3

3. Inequality is what’s masked by the GDP or GDP per capita. In a country

with serious social inequality, most income is earned by a small number of

wealthiest people. These people can afford a high standard of living which poorer

3 Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage Learning, United States of America, pp.207-208.

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people can hardly reach. The GDP of a country like this may be high but indices like

mean years of schooling or life expectancy are probably not, since a high standard

of living is impossible for most population.

In 2010, the United Nations introduced the Inequality-adjusted HDI, “a

measure of the level of human development of people in a society that accounts for

inequality”. The problem of inequality has now been better represented, which

gives us a more accurate look at the level of well-being in different countries in the

world.

4. There are certain economic activities that have negative impacts on social

well-being but end up being recorded as positive contributions to GDP. The

countries with the highest GDP 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. For instance, China is the number one emitter of carbon dioxide in the world

as a result of its high level of manufacturing and industry-related activities. While

this contributes to a high GDP for China, many Chinese people have to suffer living

and working in a polluted environment. On the contrary, this problem is counted

into the HDI of China as life expectancy of the Chinese decreases, thus lowering the

HDI.

GDP excludes leisure and human costs associated with the production of

goods and services. Only output matters; no allowance is made for how long and

how hard people work to generate it4. If two countries have the same GDP but

people in one country have to work in much more strenuous conditions than

people in the other, they cannot be considered to be of the same level of well-

being.

4 Gwartney, J.D., Stroup, R.L., Sobel, R.S., Macpherson, D.A. (2011), Macroeconomics: Private and Public Choice, Thirteenth Edition, Cengage Learning, United States of America, p.160.

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CONCLUSIONCONCLUSION

Economists and statisticians work hard to build up indices like the GDP or

the HDI for what? It is because people need tools to interpret and assess a

country’s level of well-being and look for appropriate solutions. And yes, tools have

errors. Although the HDI has been demonstrated as more comprehensive and

directive than the GDP in preceding parts of this essay, there are certain well-being

problems remaining unreported. Any indicator, either the GDP or the HDI, should

only be viewed as a tool, not the actual situation it reflects.

In my opinion, the HDI has a lot of potential to be developed into a more

precise indicator of social well-being. If problems such as crimes, unemployment or

corruption can be measured and added to the computation of the HDI, I believe it

will more and more closely follow the actual development path of society.

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REFERENCESREFERENCES

1. Gertner, J (2010), “The Rise and the Fall of the GDP”, The New York Times.

2. Gwartney, J.D., Stroup, R.L., Sobel, R.S., Macpherson, D.A. (2011),

Macroeconomics: Private and Public Choice, Thirteenth Edition, Cengage Learning,

United States of America.

3. About.com Geography, HDI – The Human Development Index.

4. United Nations Development Programme, Human Development Reports,

<http://hdr.undp.org>.

5. The World Bank, Indicators, <http://data.worldbank.org/indicator>.

6. Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage

Learning, United States of America.

gdp vs. hdi

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