Economists and exceptionally macroeconomist use a large variety of means in their effort to study and explain the functioning of the economy over a certain period of time. One of their greatest concerning is the determination of the wealth created during a year in a country, which is in other words the GDP. The National Income or National Output also known as the Gross Domestic Product (GDP) is an instrument used by the National account: which is “the framework that summarizes and categorizes productive activity in an economy over a specific period of time,[ year]” (Melvin, B. 2005, 123), to estimate the total economic activity in a country or region. It measures the market value of all final goods and services produced in a year within a country (concerned solely with measuring the monetary flow). Indeed, the GDP is a good indicator of an economic growth and can also indicate the “pulse” for a country, but is it a good indicator of people welfare and happiness within the country? Herein, we will subsequently see how the GDP is calculated, what it represents and finally which indicators could be more appropriate to measure people’s welfare and happiness in a country (UK).
In theory there are three ways of measuring the GDP. Through the production/output approach, the expenditure approach and finally the Income approach. As an aggregate measure of the total production/output in an economy, GDP (O) can be measured as the summation of the value added generated through the production of each businesses/ industries in the economy. By summing up the added value in the production process of each firm in the economy, we avoid going the mistake of “double counting” the production of a same good. In other words we take the value added of a transaction and subtract form it the immediately preceding transaction taking into account only the Gross Value added which is according to: (The o ffice for National Statistics, Blue book ( 2009 ), 228),
“the value generated by any unit engaged in production, and the contributions of individual sectors or industries to gross domestic product. It is measured at basic prices, excluding taxes less subsidies on products”.
In the UK economy, the estimation of the GDP through the Gross Value Added (GVA) could be calculated by summing up the GVA at basic price of all the industrial sectors in the economy during a year. (See figure 1)
The GDP, GNP through the expenditure approach estimated all the expenditure of all the economic agents in the economy. It is the sum of “costumers’ expenditure, the [private, domestic] investment which represents the gross fixe capital formation (GDFCF) [in the national income, plus government final expenditure] […] which is the Total Domestic Expenditure” (Curwen, P, 1990, 28). The GDP is in fact the domestic expenditure plus export minus import (Exportation net). Therefore, the national income as it’s equation as follow=C+I+G+(X − M). Herein a figure of how the UK Final Expenditure was allocated in 2008.
Again in this approach to estimate the GDP is essentially quantitative and therefore doesn’t take into consideration the qualitative aspect and nothing is suggested in respect to people’s ‘happiness’ or welfare.
The last method to calculate the GDP is through the Income approach, where the national accounts estimates all the income paid by firms to households for remuneration as service for factor of production. According to (Curwen, P. 1990, 28) the Total Domestic Income (TDI) is the “Sum of all incomes from employment, incomes from self-employment, gross trading profits of companies, the gross trading surplus of public corporations and general government enterprises, rent and other (imputed) Incomes”. To this Total Domestic Income is also added the depreciation of stocks of physical capital occurring in the exact year to get the Gross domestic product (GDP).
In theory, the three ways on calculating the GDP have to give the same results but in reality the result are not equal. Here in quarterly figure of the UK GDP from 2004 to 2009.
We have seen that the GDP is a good indicator of economic activity for a country and also can determine economic growth (which is an indispensable condition for development) but does not reveals anything about people’s welfare and happiness and therefore this could be considered as a limitation of the GDP. Now we will see which indicator are more appropriate for the measurement of people’s welfare and happiness.
First of all, if we want to consider people welfare and see whether they are “well off” or not, it is more appealing to start looking at the GDP per Head. To obtain the GDP per head, we divide the GDP of a country by its population which is a more reliable indicator than the GDP as it indicates income per person (per head) in an economy.
The GDP per capita is indeed a good figure to examine the economic growth and the standard of living which is mainly income based but doesn’t give a real figure about people’s welfare nor happiness. This is when comes the concept of “welfare economics” which looks at the quality of life and the equity (Bergg D et al ,2005 ,277 ).
In “The Guardian” it is said that “People in the UK have a worse quality of life than many of their European counterparts despite earning more money” (Guardian (12/10/2009). Followed on by comment of the director of consumer policy at uSwitch.com Ann Robinson, who alleged that there was "more to good living than money", the UK had "lost all sense of balance between wealth and wellbeing"and added “For too long the focus in the UK has been on standard of living rather than quality of life” (Guardian (12/10/2009)
Consequently, alternatives measure do existe to measure the welfare and happiness such as, the Genuine Progree Indicator (GPI), the Gross National Happiness (GNP), the Index of substainable Economics welfare (ISEW) and the Human Development index (HDI).
Let’s look at one indicator for instance. The GPI model examine if a “country’s growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare of the people in the country”. To give a figure of this measurement outside the UK, Linda Baker in the “the Environmental Magazine” discussed that the disparity between the GDP and the was so high that “the US GPI has declined by 45 percent in the past two decades [whereas the GDP showed] double economic growth rate since the early 1950s. (May /June 1999, 15).
In conclusion, we can say that despite the limitations of GDP, it is still generally accepted as an indicator of economic health and “wellness of a nation and its society” (Bhola, G 3 /03/08) but nevertheless other indicators are more relevant and should be fully implemented for they are more reliable and precise. After analyzing what was the GDP, what it measured and also what it failed to measure, we should be interesting to see what the other indicator failed to measure as well?
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