GDP does not reflect standard of living fully

I REFER to Nominated MP Viswa Sadasivan's speech in Parliament, reported on Wednesday ('Look beyond GDP for true measure of welfare'), where he called on the Government to track indicators beyond Gross Domestic Product (GDP).

Measuring GDP is important as it provides knowledge of the amount of goods and services produced by our economy.

However, its shortcomings as a measure of standard of living have been well documented, most notably by Nobel Prize economics laureate Joseph Stiglitz.

GDP puts no value on leisure. Therefore, a society that works longer hours will have a higher GDP, but it may not score in human measurements like education and health.

It does not capture the work done in the non-paid sector. This includes volunteer work, parenting and household chores, all of which are essential for the well-being of a functioning and gracious society.

It is also a measurement that ignores the impact of productive activities on the environment. This is because negative effects are not taken into account in the calculation of increased utility.

An extreme and perverse example is the recent BP oil spill in the Gulf of Mexico. A disaster like that would actually increase GDP, because to clean up the spill, jobs are created, while measures to mitigate the harm also boost GDP.

There have been attempts to develop credible alternatives to GDP. Examples include the United Nations Human Development Index, which combines GDP with health and education measurements, and the Happy Planet Index, which combines life expectancy, life satisfaction and how environmentally sustainable a country's economic activity is.

Nonetheless, many of these measurements are often dismissed by governments, and it may take some time before measurements like Bhutan's Gross National Happiness gain credibility.

In the meantime, a simple step towards looking beyond GDP is simply to recognise that it was never designed to be an indicator of an economy's welfare; it was simply intended to measure the economy.

Seah Su Chen (Ms)

Clivebenss

24 Jul 10, 01:39

confusing??

PsycheSoma

24 Jul 10, 18:41

I just want to point out something. Even as an indicator of economic activity, GDP is flawed. GDP only measures economic activity pertaining to new products/goods/services generated by corporations and households in the country. Some of it is sent back overseas to foreign shareholders, so those shouldn't be counted. On the other hand, there's also income sent from abroad to Singapore which GDP doesn't count because this income wasn't generated on Singapore soil. GNP takes care of this problem.

However, another major flaw with GNP/GDP is that both are concerned only with production of new assets; sale of existing homes/goods don't factor in and neither does money creation. Another eg. If exports rise by exactly the same amount as imports do, assuming government spending and total investment remains the same, GDP/GNP does not change at all.

In the US, they have a more inclusive measure of national accounting known as NIPA: National Income and Product Accounts (NIPA). See this article for a good discussion of what's wrong with GDP as a measure of economic activity:

http://seekingalpha.com/article/159814-scary-drop-in-velocity-of-money-is-deflation-knocking

Unfortunately I do not know if Singapore publishes an equivalent national accounting statistic comparable to NIPA. Perhaps someone can clarify that?