Case #1: Problems in measuring GDP
When things are traded in a market, or embedded in government tax statistics, they are relatively easy to measure. Many of our measurement difficulties arise precisely because some of the most valuable things are not easily measurable. GDP easily captures the output of washing machines, but not of happiness, health, or environmental depreciation. Since we do not buy and sell clean air or moderate temperatures in a marketplace, governments are not automatically collecting statistics for use in national accounts data.
The United Nations Human Development Index systematically tries to measure three broad dimensions of economic development – health, education, and material standard of living – and produces annual statistics for all UN member countries. The map below shows the geographic range of outcomes – no prizes for guessing which colors represent prosperity and which represent poverty as measured by the Human Development Index.
Health is crudely captured by life expectancy at birth, education by the proportion of the children enrolled at school and by the proportion of adults who can read, and material standard of living by per capita GDP.
Some of these indicators are more stable than others. For example, before the financial crash, Iceland came top in the world in the UN measure and Sierra Leone bottom. But Iceland’s banks experienced the biggest crash of all, and the Icelandic economy got into serious trouble. This did not immediately affect its adult literacy or the life expectancy of its population, but these will gradually suffer unless economic prosperity can be restored. Like sausages, economic statistics simply reflect what you put into them. If you care about democracy, equality, or environmental sustainability, don’t get hung up merely because your country is not doing well on the particular things that GDP does measure.
People who visit France quickly learn that the French have a good quality of life, better than you would expect simply by looking at their GDP. They enjoy a nice climate, long lunches, access to Mediterranean beaches, and little congestion since they have plenty of land in relation to their population. They also retire at a relatively young age and, having long life expectancy, spend plenty of happy years in retirement. Their GDP statistics are measuring the production of Renault and Peugeot, and of luxuries from Louis Vuitton and Hermès, but omit plentiful leisure, lack of stress, and little congestion.
Similarly, the output of the police, civil service, and teachers in free state schools is not charged for in the market and hence not automatically valued by the market. How do we measure the output of the police? Typically, national income statisticians measure the inputs (the wage bill of police forces, rent of police stations, the cost of using police cars and police computers). This is a large step in the right direction but it is far from perfect. If society becomes more unlawful, we end up choosing to have more police to counter crime.
So GDP rises because we are spending more on the police force. But in reality, people are feeling less happy with the greater prevalence of crime, and resent having to ‘waste’ more resources on additional policing in order to counter the crime wave. Conversely, when we cut back the size of the army, GDP falls since less is being spent on the military, but we are actually receiving less defense as a consequence. Think of all this as a health warning on GNP and GDP statistics. They measure what they measure. Unless and until electorates want to spend a lot more money collecting more comprehensive statistics, GNP and GDP will use data already being collected annually for other purposes such as taxation.
1. Outline and explain 4 main problems associated with determining Gross Domestic Product for a country (GDP). (4 marks)
2. Why is it better to use the United Nations Human Development Index (HDI), rather than GDP, to measure human’s quality of life? (2 marks) What are the limitations of using GDP to measure people’s well-being? Give 3 examples. (3 marks)
3. According to Statistics Canada, real GDP for Canada declined by 2.1% in the first quarter of 2020 and fell by 11.5% in the second quarter of 2020. The second-quarter decline was the steepest since quarterly data were first recorded in 1961. Based on what you know about the calculation of GDP for a country, discuss the impact of the COVID-19 pandemic on real GDP in Canada in the first two quarters of 2020. Present and explain at least 4 reasons why the real GDP in Canada decreased so much in the first half of 2020 (4 marks). Please refer to at least 2 external sources (websites, research papers, newspaper articles, etc.) to answer this question. Be sure to cite your references using the APA format. (2 marks) For more information on Human Development Index check on this: https://en.wikipedia.org/wiki/Human_Development_Index
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