Wednesday 12 October 2011

How would you propose a relationship between GDP and economic well being?

How would you propose a relationship between GDP and economic well being? Do you believe our nation could be in a state of economic well being and what measures would need to take place?

The GDP measures the value of goods and services that have been produced within an economy.

The first thing is to make it on an individual basis. 10 people producing $1000 worth of goods are more productive (and richer) hand 100 people producing $1000 worth of goods. To keep things simple, assume that the value of what you produce is also what you earn. So we should consider GDP per capita, rather than GDP per se.

Another issue is for those economies where many people work overseas and send money back home to their relatives, thereby increasing the economic well-being of these relatives at home. Hence we should look at GNP per capital which measures the value of your Nationals.

Now, let's go back to our small economy of 10 people where everyone works and in total $1000 is produced. When I compared that economy with the one with 100 people, I implicitly assumed that in the first case, everyone produced $100 or so (10 people producing $100), and in the latter, each produced $10 (100 people producing $10 each). Since people earn the value of what they produce the argument still holds.

However, imagine that in the 10person economy, one person earns $991 and the rest each earn $1. And what if in the second economy, each person did earn $10. Which economy has higher economic well-being? Of course the person earning $991 is better off than the rest, but in general? Hence we have to look at income distribution.

Once you realise than GNPpc is not the be-all and end all of well being, you would want to extend it to more indicators.

One of the most commonly used ones if the Human Development Index (HDI) used by the United Nations.

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