Macroeconomics is the study of the economical state of a nation, and there are several terms and values that work towards expressing the financial health of any said nation. GDP (Gross Domestic Product) is one of the most common terms that is used to express this economical well-being, but there are many experts who claim that GDP figures do not accurately represent the true state of a nation's economy.
Every country has industries that produce goods, and a service sector that provides services at the same time. The grand total of all these goods and services produced within the physical borders of the country is known as its GDP, and this is a figure that runs into trillions of dollars on an annual basis. Economists have slowly been witnessing the evolution of economics as a field of study, and this has led to several subsets of the term being used. One such subset is 'Welfare Economics' which talks about the well-being and standard of living of the people residing in a particular country, and this is the primary premise for understanding this difference.
GPI (Genuine Progress Indicator) is the value that is used in this regard since it gives an idea about how the welfare and the standard of living of people has improved owing to an increase in the production levels in the economy. Hence it can be said that while GDP measures the production of actual goods and services, GPI studies the impact of GDP on the general populace over a recorded period of time.
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Calculating the GDP of a country is not a simple task, and it requires the most astute economists in the country to apply their minds and arrive at suitable conclusions. There are primarily three different methods for calculating GDP of a nation, but they should all lead to the same result. These methods are the income method, the expenditure method and the product method. The logic behind these is that the total value of goods and services produced in a country can be reached by adding the total income that producers make (the income method), the total expenditure of consumers and buyers (the expenditure method) and lastly, the total value of all the goods and services that are produced by the country (the product method).
Gross Domestic Product is also used to calculate GDP per capita but this is often mistakenly assumed to indicate the standard of living of the people. This is not a fair assumption to make since there are several limitations of GDP, as far as ascertaining the standard of living of people is concerned. Here are some common limitations of GDP, with regard to this.
- GDP does not talk about income disparity between the residents of the nation.
- GDP does not include several underground activities that people use for saving tax, and it also does not include open-sourced and voluntary production.
- GDP does not take into consideration the actual quality of the goods and services being produced, it only talks about the quantity.
- GDP also does not talk about what was actually produced. For instance, economic activity in Japan has increased for rebuilding purposes after the tsunami, so their GDP will also rise, but this does not imply a rise in the standard of living there.
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This concept was subsequently developed by welfare economists in order to counter all these limitations of GDP, and no one can say that this has not worked. GPI draws a clear line between economic growth and uneconomic growth so it is a far more accurate assessment of the standard of living of the people in a country. The primary difference between GDP and GPI here is that GPI takes into consideration the costs suffered by individuals due to certain activities that GDP actually counts as a benefit. For instance, GDP considers crime to be a benefit since the damage it causes leads to greater economic benefits, but GPI counts it as a cost due to all the damage it causes.
Other factors which are viewed in this same regard are as follows.
- Family breakdowns due to divorces and other causes
- Natural disasters and tragedies
- Ozone depletion
- Pollution of air, water, land and noise
- Resource depletion
In a way, GPI can only be arrived at after the value of GDP has been found. Necessary deductions and additions need to be made to reach this figure, and there is definitely a growing awareness about the need to do so. 'Green Economics' is also something that is becoming rapidly popular, and GPI is one of its main components.