Thursday, May 24, 2007

Does GDP measure Economic Development?

  • Examine the role of GDP figures as a measure of economic development. (15)
  • GDP measures National Output, National Income and National Expenditure.
  • GDP per capita gives a rough guide to average income per person in the country.
  • GDP is a rough guide to living standards.

  • Higher GDP enables more consumption of goods and services.
  • Potential for Higher tax revenues, and therefore government spending on public services like health, education and transport.
  • Higher GDP may create more employment opportunities.
  • Generally countries with much higher GDP OECD countries have more economic development than low GDP

Limitations of GDP in measuring Economic Development

1. Depends on distribution of GDP.

For example, if 90% of GDP is owned by small oligarchy then the majority of economy may have low economic development. This is an issue for several sub saharan African economies, where high % of GDP is owned by small % of those in power.

2. GDP may underestimate economic development.

This is because official GDP statistics do not include black market; this is a significant part of subsistence economies. However, economic development often reduces the size of this "black market" or economic activity which is not recorded.

3. Difficult to Compare Living Standards through GDP.

This is because exchange rates do not reflect local purchasing power of a currency. For example, a Big Mac may cost $5 in Japan, but $1 in India. Therefore, comparisons need to take these into account.

4. Levels of Infrastructure important to economic development.

For example, GDP may not be used to improve infrastructure, communication and transport. These factors are very important for determining development. GDP does not indicate how money is spent. GDP may be used to finance projects that do not help education development.

5. Standards of education important for long term economic development.

6. Some countries may get high GDP from primary products, but struggle to develop and diversify into manufacturing and service sector based economy.

See also:


Anonymous said...

Error? Forgot the word NOT? i.e. it should read GDP does NOT tell how money spent?

Tejvan Pettinger said...

yes, post updated. Thanks