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Discuss About The Interdisciplinary Journal For Quality Of Life.

Limitations of using GDP as a measure of economic performance

As per the report issued by Commission on the Measurement of Economic Performance and Social Progress in 2009, Gross Domestic Product Per Capita cannot be regarded the only indicator of country’s economic performance and its social progress due to certain limitations possessed by the same. In order to reflect the structural changes in the modern economies, conventional measurement concept of economic activity must be adopted. A major limitation of GDP revolves around the point that it merely takes into account the quantitative aspect of production as well as consumption activities and it does not consider the qualitative element. This fact leads GDP being a flawed indicator of country’s progress. This feature of GDP results into inaccurate representation of economy’s progress and ultimately results in the poor policy decisions.

There are numerous alternative ways of measuring the progress have been identified such as Measure of Economic Welfare (MEW), the Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI). All these indicators are designed in such a way that they have the potential to reflect the economic welfare associated with economic activities of an economy in a better way. Moreover, these factors take into account the sustainability components to adjust depletion as well as pollution costs.


GDP is used to measure the country’s income and it is generally assumed that higher the country’s GDP, greater is the standard of living of its citizens. However, it has been revealed by the studies that material progress of a country failed to achieve rise in the social well-being of humans of the country. From this revelation, it has become evident that GDP and other conventional progress measures are not enough to measure the overall impact of rising economy on its sustainable well-being.

However, in-spite of so many factors being in existence, GDP per capita is still a prominent measure of living standards.

South Korea has experienced tremendous economic transformation which is among the greatest transformation across the world in the last 60 years. During its initial years, the country was an economy that was pure agriculture based. However, in 2016 it had achieved 11th highest GDP across the world due to various factors which are discussed below.

It has been identified that human capital has played an important role in attaining a strong economic growth in South Korea. However, as per there are various factors that contributed to the firm growth of GDP of South Korea. These factors are physical capital accumulation, the strong expansion, financial liberalisation and the export expansion.

Alternative measures of a country's progress

The other important factors that have contributed to the strong positive growth of GDP per capita of South Korea in the recent times are:

  • The capacity of the country to promptly adapt the new advanced technology: This factor allows enterprises in South Korea to adapt and deploy upgraded technologies in their business operations which enhances their efficiencies and ultimately the total revenue.
  • The ability to discover new opportunities for growth and development: South Korea has invested huge time and consideration to the technological development and innovation processes to grow and develop significantly. The innovation and technology has played huge role in grabbing the opportunities of export competitiveness which has contributed to the remarkable economic growth over the last few decades.  
  • The capacity of South Korea’s entrepreneurs as well as its policy makers to easily and quickly adjust and recover from the sudden external shocks: South Korea has an excellent record of maintaining a macroeconomic stability since last few decades. In late 1990s the economy of the country had to face major most financial market crisis of Asia. However, the economic reforms that were introduced in the country in response to such economic disaster have made the country more resilient to regional as well as global shocks.
  • The maintenance of income distribution system which is relatively equitable has contributed to the high growth rate of GDP of the country.


The above discussed factors are likely to improve the well-being of humans but not in all the aspects. Although GDP per capita is observed as rising at a firm rate but yet there is a divergence in GDP (averaging 5.8 %) and GDI (averaging 3.3 %) of South Korea. It could be said that GDP per capita is indicating the continuing development in the economic activities but the citizens of South Korea are not experiencing a sound well-being and this could be analysed by taking into account various social or environmental factors of the country. After the financial crisis, there has been reported a constant increase in the problem of income inequality and also there has been stagnation in the welfare capital of the country along with huge public debt (Federal Reserve Bank of St. Louis, 2018). All these factors are clearly showing that the growth in GDP due to the above discussed factors in question 2 (a) are not reflecting the betterment of the human well-being of the country. Rather, the rise in GDP might overstate the true level of human well-being of the nation. The ever increasing divergence of GDP and GPI after the financial crisis of year 1997 clearly reveals that the citizens are not at all enjoying the well-being as that is suggested by the rising GDP per capita. After considering the social as well as environmental aspects it has been realised that only physical capital of the country has been found to have a material positive impact on the true progress of the country. Rest other factors that are important for the determination of country’s GDP per capita such as research and development, exports and inflation are not showing the positive signs. The variation in the GDP per capita drivers and the drivers of country’s GPI per capita shows that only GDP measure must not be relied upon solely for the determination of well-being of the country.

No the list provided under various Genuine Progress Indicators studies containing items of its costs and benefits cannot be said to be exhaustive. It includes 25 components out of which some of them have negative impact of income inequality on the well-being and some have positive impact. The basis of the South Korean GPI is the private consumption expenditure. Not each and every personal consumption item is included in the list of GPI due to the fact that excessive consumption is wasteful and does not enhance the well-being. Hence, certain items are excluded from the list for the determination of GPI such as tobacco spending due it its risk on the health and also various other items such as healthcare and education whether public or private, cost involved in vehicle accidents, insurance service cost, environmental protection as these spending are made in defensive expenditure.

Drivers of GDP and GPI per capita in South Korea

It would be incorrect to say that the list provided in GPI studies will be sufficient and exhaustive enough to calculate GPI.

The list of GPI must include all those items that make life worthwhile (The Conversation, 2014). The additional items that could have been included in the list of GPI shall be:

  • The cost of fulfilling social responsibilities
  • The cost of environmental protection
  • Cost of crime
  • Cost of unemployment
  • Higher education
  • Household work

Following are the factors that significantly drive the per capita Genuine progress indicators of South Korea are as follows:

  • Physical capital expenditure per capita;
  • Export expenditure per capita;
  • Research and development expenditure per capita;
  • Inflation (% age change in the CPI: consumer price index); and
  • Human capital: This is comprised of total number of citizens of the country at and above age of 15 years who have completed their post-secondary academic education as a proportion of total South Korean people who are of 15 years and above.
  • Natural disasters
  • Pollution and other environmental factors
  • Social factors

Gross Domestic Product is the overall production of goods and services of a country. Genuine Progress Indicator indicates country’s GDP as well as its welfare figures. It has been identified from the article of Feeny et al. that the drivers of GDP per capita and GPI per capita clearly vary from that of GDP per capita as physical capital, research and development, export and inflation are key factors of determining the GDP per capita of South Korea but when it comes to genuine progress indicator only physical capital has a positive contribution on it once the social as well as environmental points of economic growth are considered. The well fare nations have started calculating their GPI to represent the income distribution of their economic growth to the individual citizen’s life. While the said factor is not considered in determining the country’s GDP. GPI takes into account various factors such as green economy of the country, concerns related to pollution and ozone layer depletion, natural disasters and various social factors.


Over the last half century, South Korea has turned up to be the leading model for the developing countries due to its significant economic growth. The economic growth of the country has allowed it to become 8th largest trading country in the world and also to achieve a per capita income of around $ 26000. However, the economy of South Korea has flattered down with a fall from 8.1% annual growth rate which was reported during 1965-2005 to an average of 3.6% over the last 10 years. Moreover, OCED has projected a further decline in the economic growth rate making it around 2.5% in the upcoming times.

However, with the help of various economic reforms, policies and strategies which can foster the varied sources of growth by reducing the over reliance of South Korea on the export functions and the large corporations, South Korea can certainly revive and sustain a long term growth in economic terms.

The economic performance of South Korea over the past 50 years has been attributed to various factors such as high savings rate, sound human capital and excellent institutional, fiscal and monetary management policies. Further, the trade liberty in the country has provided it an access to cheap imported raw materials, larger markets to sell their goods and the use of advanced technologies of different countries. Also, the performance based incentives also facilitated the country to continuously upgrade its competitive advance in the international markets. But, all these policies had a problem which drove South Korea to excessively depend on the export functions for the purpose of growth. In 2013, the country has accounted for 56% of its overall gross national income which was merely 15% in 1970. Resultantly, the country has become severely exposed to the risk of change in the demand of its goods and services in the international markets. Further, there is a huge imbalance in the manufacturing and service sector of South Korea. As against this background, the official bodies of country must formulate such growth strategies and policies which are aimed at both sides i.e. demand-side rebalancing as well as increasing the supply-side productivity.

Revision of GPI list components

As a part of demand side policy, South Korea shall initiate with boosting up its household expenditure (spending). This will demand reversing the steep fall in the middle-income household unit’s proportion which is currently at 67.5% as compared to 75.4 % in 1990. Transfer of unutilised corporate savings funds to the domestic units by reducing the total number of low-waged part time workers who are not even permanent would result in boosting up of demand of country’s own products and services and would also reduce the problem of income inequality.

Further, such policies must be framed which aims at enhancing the female workforce participation and reducing the spending on private education would also serve the purpose of achieving sustainable economic growth. Further, the quality as well as quantity of investment especially of small medium enterprises in South Korea’s service industry must be improved.

On the other hand, supply side policies must be designed to stimulate productivity growth such as development of contemporary service industries like health care, education, business process outsourcing, legal and financial service sectors and telecommunication industry. Policies must also be in place to ease down the country’s product regulations and also there must be low barriers to the foreign investment so as to promote technological advancement, innovation and competition (World Economic Forum, 2015).  

South Korea is the economy which has experienced remarkable economic growth over the past few decades. Thus, it has been named as ‘Asian Tiger’. Before the Asian Financial Crisis also known as currency-cum-banking crisis that occurred in 1997, the country has achieved the average growth rate of 8.7% per year from since 1963 to 1996.  The countries like Thailand, Indonesia, Singapore, Hong-Kong and South Korea have achieved outstanding economic growth before the crisis but post crisis the countries had to face a steep fall in their economic growth rates. However, despite the steep fall in the growth rate after the Asian Economic Crisis of 1997, South Korea quickly recovered to around 5% (average) by the first half of 2000s.

Over the period of last 36 years, the average GDP per capita was around 6.3 million but by the end of year 2005 it had touched the level of 14.9 million. During the same period GPI per capita had also reached the highest value despite of the fact that it was approximately four million lower than country’s GDP per capital (Feeny, et. al., 2012).

The export per capita of South Korea have grown at the steady rate post crisis with an average value of around 1.2 million and also there has been a growth in the research and development per capita at the steady rate with an average value of 100000 won. Even though the physical capital of the country declined significantly from 1997 to 1998 by around 25% but it continued to grow it the further periods post economic crisis but at the slower pace than that of pre-crisis period.

According to OECD, the rise in the ratio of persons from age group of 15 years to 64 years (referred to as working age) South Korea to the total population of country was the major reason of its rise in GDP per capita. Further, during this period various other components of GPI also increased such as weighted adjusted consumption expenditure, welfare capital and household labour. Coupled with decrease in the level of foreign debt held by the country all those factors led to the increase in country’s GDP per capital.

References:

Federal Reserve Bank of St. Louis, 2018. How Did South Korea’s Economy Develop So Quickly? Available at: https://www.stlouisfed.org/on-the-economy/2018/march/how-south-korea-economy-develop-quickly Accessed on: 18.10.2018

Feeny, S, Mitchell, H, Tran, C and Clarke, M 2012, 'The determinants of economic growth

interdisciplinary journal for quality-of-life measurement, pp. 1-20.

The Conversation, 2014. Beyond GDP: are there better ways to measure well-being? Available at: https://theconversation.com/beyond-gdp-are-there-better-ways-to-measure-well-being-33414 Accessed on: 18.10.2018

versus genuine progress in South Korea', Social Indicators Research: an international and

World Economic Forum, 2015. How South Korea can sustain strong growth. Available at: https://researchbank.rmit.edu.au/eserv/rmit:20304/n2006038394.pdf Accessed on: 18.10.201

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