FOREIGN TRADE UNIVERSITY

ESSAY
MACROECONOMICS 1
Topic:
Some people believe that Gross Domestic Product (GDP) is an
inadequate measure of societal well-being and should be replaced by
the Human Development Index (HDI). Do you agree with them?


Full name : Vu Thi Ninh
Nguyen Viet Trinh
Class : A31-CLC-KT
Major : External economics
Instructor : Lecturer Hoang Tuan Dung

Macroeconomics A31-CLC-KT
1

We need a new economic paradigm that recognizes the parity
between the three pillars of sustainable development. Social, economic and
environmental well-being are indivisible. Together they define gross global
happiness, said the Secretary-General Ban Ki-moon in the high-level
meeting Happiness and Well-being: Defining a New Economic
Paradigm at UN Headquarters in New York on the 2
sd
, April, 2012. These
words remind us of the fact that not just economic well-being but social
well-being (as much as enviromental well-being) is also an essential factor
in rating a nations happiness, as well as that of a man. Therefore, the
important thing to do now is to find a way to measure social wellbeing,
and should that be Gross Domestic Product (as some country has done)?
However, in actual fact, there are people who believe that GDP is
inadequate and it should be replaced by the Human Development Index
(HDI). . We find this opinion very convincing.
1

The United States Institue of Peace (USIP) defined social well-being
as an end state in which basic human needs are met and people are able to
coexist peacefully in communities with opportunities for advancement.
2

But what is an end state? And we can base on which factors to evaluate
it? To answer these questions, the USIP also pointed out the 4 neccesery
conditions to achive this end state, which were: Access To and Delivery
of Basic Needs Services, Access To and Delivery of Education, Return and
Resettlement of Refugees and Internally Displaced Persons, and finally
Social Reconstruction. Therefore, whichever index we use to measure
social well-being, it has to represent these conditions of a society.
Gross Domestic Product GDP is a very familiar definition to all of
us. Its a concept which belongs to the economics category. Generally,
GDP is the market value of all final goods and services produced within a
country in a given period of time.
3
More specificly, GDP measures two
things at once: the total income of everyone in the economy and the total
expenditure on the economys output of goods and services
4
Born after
Macroeconomics A31-CLC-KT
2

World War II, since then GDP itself has appeared to be the best single
measure of economic well-being in a society. It speaks to us how the
economy in each country is working, and from there the government can
bring out the right policies to adjust the economy.
5

Issues with GDP being a measure for societal well-being.
Opinionstage.com a website which oftens seeks for viewerss
opinion once did a small survey with the question: is GDP growth a good
measure for living standards? For the results, the answer that received 84%
vote was NO. Although it doesnt mention social well-being directly, this
kind of survey is one of many proofs that say: GDP is not an anaquate
measure of social well-being and major of people can see that. But why
exactly?
6

As we have said above, there are four conditions needed to achive
social well-being, and GDP doesnt represent any of those, at least not
directly. In 1968, when Senator Robert Kennedy was running for president,
he delivered a (now famous) speech in Kansas on the limitations of GDP:
"It counts air pollution and cigarette advertising, and ambulances to clear
our highways of carnage. It counts special locks for our doors and the jails
for the people who break them. It counts the destruction of the redwood
and the loss of our natural wonder in chaotic sprawl...Yet...[it]...does not
allow for the health of our children, the quality of their education or the joy
of their play.It does not include the beauty of our poetry or the strength of
our marriages, , neither our wisdom nor our learning, neither our
compassion nor our devotion to our country. It measures everything in
short, except that which makes life worthwhile."
7
With the four
components: consumption (C), investment (I), government purchases (G),
and net exports (NX) its a matter of fact that when we look at GDP, we
can only see the perfomance of the overall economy, but there are no signs
of the living standard, life satisfaction or maybe the number of students
enrolling in school, the homeless, etc. For example, here is a hot issue- the
Macroeconomics A31-CLC-KT
3

benefit of leisure time: people work 5 days a week, 8 hours a day, but if
they keep working on their free time instead of relaxing, more goods and
services will be produced, the GDP might rise, but we can not conclude
that they are better off, the lost of relax time may lead to mental damanges..
On the other hand, social well-being is all of those things that GDP isnt
concerned with.
More money-more chances??
However, there is an opinion we can not ignore: countries with higher
GDP, means a higher-developed economy, actually have more
opportunities to access to social well-being. Nevertheless, this doesnt
make GDP any more adequate in measuring social well-being. Lets have a
look at this graph, which showed GDP per head and life satisfaction in UK
- a developed country from 1973-2006.
8



Source: Eurobarometer, cited in Thomas and Evans, 2010, p.33
We can see from the graph that in this period life satisfaction in UK
remained highly, meanwhile GDP increased gradually. This was a proof
of a fact that the growth in GDP doesnt lead to the growth in life
satisfaction, or more generally, social well-being. Now lets take a little
time to look back at the definition of GDP. Its a Gross concept, which
means not only activities that have possitive impact but ones that create
negative effects on socials well-being also end up being recorded as
positive contributions to the GDP. Take for instance, crime. Rising criminal
activities can increase a country's GDP through greater expenditures toward
maintaining law and order (e.g., hiring of additional police members,
Macroeconomics A31-CLC-KT
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purchase of guns, prisons, etc).9 Another example is the consequence of
having depleted forests because of logging activities. GDP is increased
when trees are cut down for lumber and other uses. In conclusion, , both
committing certain types of crime and buying petrol can have the impact of
a surge in GDP but will not increase welfare (Stiglitz, Sen and Fitoussi,
2009).
Human Development Index HDI appeared later than GDP, in about
1975. The United Nations has been using it to measure a countrys growth
and achievements in human development. The caculation of HDI is based
on three dimensions and four indicators: health (life expectancy at birth),
education (mean of years of schooling for adults aged 25 years and
expected years of schooling for children of school entering age) and living
standard (gross national income per capita).
10
Achievement in each area is
measured by how far a country has gone in attaining the following goal:
life expectancy of 85 years, adult literacy and enrollments of 100 percent,
and real GDP per capita of $40,000 in purchasing power parity terms.
11

Although highly desirable, these goals have not yet been fully attained by
any country, so the actual indicators are expressed as decimal shares of the
ideal .

Macroeconomics A31-CLC-KT
5

First of all, we need to point out that in many respects, the HDI has
been remarkably successful. The New York Times once took this comment:
only one measure has succeeded in challenging the hegemony of growth-
centric thinking. the Human Development Index.
12
Not just that but its
annual publication has attracted significant attention from the media and
national policymakers from a diversity of countries. Thus, though during
its time of being used, HDI has been criticized for different reasons but its
still highly appreciated, and one of the reasons for that is HDI continuously
reminds the government, organizations, firms,.... to focus on other aspects
of life beside economy, such as: education, living standard, health, etc.
Secondly, acording to the definition of HDI, we can see that it does
reflect some aspects of social well-being in a very direct way. In fact, one
of the great advantages of the index is that it allows countries to be ranked
in order of their achievements in human development. This already makes
it a better measure than GDP.
On the other side, reality has demonstrated the relationship between
HDI and social well-being. Normally, countries with higher HDI actually
has higher access to social well-being. Take for instance, Norway,
Australia, Netherland, United States, and New Zealand were the five
countries that ranked in the top in the Human Development Report 2011.
In the Better Life Index rate (between OECD countries), these countries
may not take the 1
st
place in individual ranks, but if we compare their
performances with others based on some dimensions of well-being (as a
whole) like: housing, community, education, health and life satisfaction,
they again stays among the top ones.
13
If you still have doubts, lets move
our attention to the lower places in the HDR 2011 , here we have China
(ranked 101/187) and India (134/187). For very high developed-economy
and great population, these two nations, nevertheless, have the literacy rate
in turns are: 92.2%(2007)
14
and 74.04 % (2011 census)
15
Also, the Global
Peace Index 2012 has ranked China and India 89
th
and 142
sd
place over 158
Macroeconomics A31-CLC-KT
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countries; meanwhile, the above-mentioned countries (except for the Unied
States) has all remained in high positions. Another thing we want to point
out here is China and India are in the top ten coutries with highest GDP
(China: 2/184 and India 10/184, listed by the International Monetary Fund-
2011)
16

However, nothing is perfect. HDI itself has some disadvantages,
either!!! For example, it does not allow us to understand why a country's
index changes over time- is it the result of a change in life expectancy or,
maybe, a change in GNI per capita???? We can not khow for sure!! Take
another instance, the aspects of well-being included in the HDI obviously
excludes other social dimensions, such as: equity, political freedoms,
human rights, or sustainability,etc. Despite all of these (and some proplems
that we dont mention here), from what we know, compare to GDP and
other indexs , HDI is still the most adequate way to measure social well-
being.
In conclusion, GDP with its slogan: money can buy it all, is already
an old index that doesnt keep up with nowadays social development,
where happiness is created by many different composites. But no worry, we
already have a very good replacement - HDI!!!
Macroeconomics A31-CLC-KT
7

References

1
United Nation, New economic paradigm needed including social and enviromental
progress, viewed 28
th
Septemper 2012,
<http://www.un.org/apps/news/story.asp?NewsID=41685#.UGppdiLsFdg]>
2
United States Institute of Peace, Social Well-Being, viewed 23
rd
Octorber 2012,
<http://www.usip.org/guiding-principles-stabilization-and-reconstruction-the-web-
version/social-well-being>
3
Mankiw, NG 2011, Principles of economics, 6
th
edn, Cengage Learning, Cambrige
4
Mankiw, NG 2008, Measuring a Nations Income, Principles of Macroeconomics,
5
th
edn, Cengage Learning, Cambrige
5
InterActiveCorp, 1996, Human Development Index, viewed 17
th
October 2012,
<http://middleeast.about.com/od/h/g/human-development-index-definition.htm>
6
Is GDP growth a good measure for living standard?, viewed 28
th
Septemper 2012,
<http://www.opinionstage.com/debates/is_gdp_growth_a_good_measure_for_living_sta
ndards>
7
Qatar Media Corporation, 1996, GDP growth is no measure of societal progress, 27
May 2011, viewed 6
th
Octorber 2011,
<http://www.aljazeera.com/indepth/opinion/2011/05/2011526135338692723.html>
8
Sebastian, K 2012, Is GDP a good measure of economics activity and well-being?,
ebook, viewed 28
th
Septemper, <http://www.grin.com/en/e-book/192532/is-gdp-a-good-
measure-of-economic-activity-and-well-being>
9
Rapid Intelligence, Gross Domestic Product vs Human Development Index, viewed
7
th
Octorber 2012, <http://www.nationmaster.com/article/Gross-Domestic-Product-vs-
Human-Development-Index>
10
United Nation Development Programme 2011, Human Development Index, viewed
23rd Septemper 2012, < http://hdr.undp.org/en/statistics/hdi/>
11
World Bank, Composite Indicators of Development, viewed 20
th
Octorber 2012,
<http://www.worldbank.org/depweb/beyond/global/chapter15.html>
12
Jeni Klugman, Francisco Rodrguez, Hyung-Jin Choi, 2011, The HDI 2010: New
Controversies, Old Critiques, 2011/01, United Nations Development Programme.
13
The Organisation for Economic Co-operation and Development, 1961, OECD Better
life index, viewed
6th
October 2012,
<http://www.oecdbetterlifeindex.org/#/55555555555>
Macroeconomics A31-CLC-KT
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14
List of countries by literacy, viewed 18
th
October 2012, <
http://en.wikipedia.org/wiki/List_of_countries_by_literacy_rate>
15
Literacy rate in India, viewed 17
th
October 2012, <
http://www.mapsofindia.com/census2011/literacy-rate.html>
16
List of countries by GDP (nominal), viewed 6
th
October 2012,
<http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29>





Word count:_ No references: 1715
_With references: 1946