Describe about the Business Economics for The Developmental Economics.
GDP the most traditional metric used in the developmental economics. It is often used as a benchmark in primary objective for decisions undertaken for global based institutions and effective policy initiatives undertaken. In addition, it also helps in measuring the economic activity of that constitutes to the promotion of welfare, human development and well-being in a sustainable manner.
GDP per capita as an indicator is widely used because the more the people consume, the more satisfying a human being becomes leading to a better off position. As a comparison, rich (developed) nation’s consumer more while poor (underdeveloped) nations less. The GDP per capita income can be given as real GDP divided by the total number of population in the country (Kubiszewski et al. 2013).
As per United Nations (2012), it is used an indicator to measure the economic level output relative to the country’s population. However, its purpose is to reflect the total well-being of the nation. Moreover, it suits to be relevant in the production of the goods and services to maintain sustainable development through aspects of development. Conversely, it helps in determining priorities, availability of resources to meet the economic performance. As a result, UN also uses GDP per capita income to decide the level of aid allowance for nations and in its definition of the size of evaluations of member states.
On the other hand, this indicator also links to other indicators that are more disaggregated indicators. The example of such indicators are net migration, land use change, population growth, forest area and arable land per capita.
Nevertheless, GDP is considered an adequate growth measure for economics for industry because it keeps track of all the spender and consumer spending. This matter greatly to the national boundaries as factory output is presumably the centre establishment of economy strength 9 Christensen and Raynor 2013). The developed economies are often associated with technology that is advanced whether it is energy efficiency or significant input in the intellectual property.
However, in all the GDP per capita includes only the marketed services and goods as well as ineffective capital cash flows from leisure and household production with other un-marketed goods and services. Hence, after considering all these factors, it can be said that economic activity not only comprises until production of goods and services but also extends to net societal accumulation of productive resources, economic insecurity as well as income distribution through poverty and inequality based on different value judgements (Pigou 2013). Although, GDP is known to record the level of consumption but does not motivate to provide any literature that proves that “GDP is a good indicator of well-being.”
GDP per capita, a macroeconomic tool can be used for production but there are many factors due to which increase in GDP per capita is not considered an indicator of wellbeing. There are many economists as well as political leaders have resented it in the long run. Robert F. Kennedy was of the idea that GDP per capita has made the country lose its personal excellence as well as community in the event of accumulating material things. In addition, he believed that though GDP per capita has managed to achieve production and consumption of goods and services but beyond that, the “disutility” arisen from production and consumption has led to net drain on health and happiness, which are not measured by GDP per capita in long run. However, Robert F Kennedy opined that GDP measures everything “…except that which makes life worthwhile” (Oishi and Diener 2014)
On the other hand, given GDP per capita measures, it has been used to measure the aggregate economy in GDP and correctly, plays a role of monetary and fiscal policy but it fails to measure the economic welfare and economic wellbeing. Although, national accounting founding fathers like Samuelson, Kuznets, Hicks and Tinbergen were well aware of the issue but were explicit about it (Coyle 2015).
According to Stiglitz Commission, there is need to adapt a new system that not only measures the economic activity to reflect structural change but also measure the growing share of increasingly complex products through output and economic performance. However, in some countries as well as sectors, increasing output depicts increase in quality of goods and services in quantity but to measure quality, it is important that real income as well as real consumption needs to be measured, as they constitute to be people’s material well-being (Munda 2015). Nonetheless, undervaluing quality improvements is overrating inflation and in turn undervaluation of real income.
As per Marone (2011), it is often stated that GDP per capita only accounts for “right goods” and not for “side products”, that explains the negative effects of negative externality or benefits of good education. GDP is considered a flow concept, as a result, Brandolini, Magri and Smeeding (2010), is of the view that living conditions in household are dropped with asset-based poverty measurements. Consequently, the households are forced to draw on their financial as well as real asset holdings in the future, thereby maintaining their standards below poverty line.
Henderson (2013) further explained the GDP per capita as a bad measure of wellbeing by giving an example using that the government’s contribution to GDP is not measured by costs bit by adding value. The example elucidates that if $40 billion is spent on postal service then it adds to the GDP. Further if $20 billion is shifted to privatisation (public to private), it still adds up due to national income accounting. As a result, the effect on GDP is $20 billion but the increase in wellbeing is nil. Surowiecki (2013) has enlightened the same concept explaining digitalization is distinctive but the value it creates on the consumers is not recorded in the increase of GDP. This aspect widens the gap between what is measured and what is not measured in the economy.
Brandolini, A., Magri, S. and Smeeding, T.M., 2010. Assetâ€based measurement of poverty. Journal of Policy Analysis and Management, 29(2), pp.267-284.
Christensen, C. and Raynor, M., 2013. The innovator's solution: Creating and sustaining successful growth. Harvard Business Review Press.
Coyle, D., 2015. GDP: A brief but affectionate history. Princeton University Press.
Henderson, D. 2013. GDP: A Bad Measure of Well-Being | EconLog | Library of Economics and Liberty. Econlog.econlib.org. Available at: https://econlog.econlib.org/archives/2013/11/gdp_a_bad_measu.html [Accessed 18 Sep. 2016].
Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, pp.57-68.
Marone, H. 2011. Measuring Economic Progress and Well-Being How to move beyond GDP?. oxfamamerica.org. Available at: https://www.oxfamamerica.org/static/media/files/measuring-economic-progress-and-well-being.pdf [Accessed 18 Sep. 2016].
Munda, G., 2015. Beyond GDP: an overview of measurement issues in redefining ‘wealth’. Journal of Economic Surveys, 29(3), pp.403-422.
Oishi, S. and Diener, E., 2014. Can and Should Happiness Be a Policy Goal?. Policy Insights from the Behavioral and Brain Sciences, 1(1), pp.195-203.
Pigou, A.C., 2013. The economics of welfare. Palgrave Macmillan.
Surowiecki, J. 2013. Gross Domestic Freebie - The New Yorker. The New Yorker. Available at: https://www.newyorker.com/magazine/2013/11/25/gross-domestic-freebie [Accessed 18 Sep. 2016].
United Nations. 2012. Gross Domestic Product Per Capita. Available at: https://www.un.org/esa/sustdev/natlinfo/indicators/methodology_sheets/econ_development/gdp_percapita.pdf [Accessed 18 Sep. 2016].