Gross domestic product v gross national happiness

Introduction

Human beings are created in a unique way. The qualities we engage differentiate us from one another, as we are gifted with unlimited blessings. We have almost full control over our actions and behaviour, which is the reason why we sometimes struggle to innovate new methodologies for our well-being.

Going back in history we started our lives from caves until being part of this Global village. The question we ask, that are these changes such as measuring Gross Domestic Product (GDP) as well as Gross National happiness (GNH) really for the best?

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Within this assignment, in the light of Economics we will be discussing the way Nations/States manage their lives (well being). The main focus will be on explaining the differences between Gross Domestic Product (GDP) and what the state of Bhutan in the Himalayas call ‘Gross Nation Happiness’ (GNH). The assignment will then move onto discussing the main problems of measuring both GDP and GNH.

GDP formally known as Gross National Income (GNI) has been elaborated from a Russian-born, American educated, and “Father of National Income Accounting”. Dr Simon Kuznet introduced the method of calculating National Income, although concept of National Income has existed for hundreds of years. Consistent measure of National Income remained invisible or nonexistent before Kuznet’s work. Byrns, R T. While the GDP and the rest of the national income accounts may seem to be arcane concepts, they are truly among the great inventions of the twentieth century. (Paul A. Samuelson and William D. Nordhaus)

Like any other process, the method National Income (NI) has crossed many stages to become GDP. At this day and age we have a barometer to gauge the financial health of a Nation and yes, money plays a vital role to fulfil the necessities of life, but it has been proven that stress levels are much higher within the wealthier communities. The question, which arises here, is what is it that’s lacking, despite of having fair and good financial health, especially in developed countries, as the majority are still not living a happy life. Crabtree, S. (Oct 2009)

However, GDP was intended to be a measure of economic growth. GDP was never planned to be a measure of overall social well-being. This western economic theory makes the statement that economic growth will enhance social well-being. Research has indicated that in most cases this statement is true, for example when basic human needs are better met. However, GDP is seen to be an imperfect measure, as it does not account for the environmental and social degradations that often accompany economic development.

“Although gross domestic product (GDP) is not intended to be a measure of societal welfare, it is often used as such. One shortcoming as a welfare measure is that it fails to account for the non-marketed value of natural resource flows.” Turner, P. Tschirhart, J. (1999)

Moreover, GDP was intended to help politicians with the circumstances of World War II. (Bureau of Economic Analysis, 2000). It was a guide to post-war economic policy and it is hard to underestimate its success. William M. Daley, U.S. Secretary of Commerce, stated that:

“Since the end of World War II, when the GDP accounts were more fully developed and in wider use, the boom and bust swings are much less severe. They have had a very positive effect on America’s economic well-being, by providing a steady stream of very useful economic data.”

The success of the GDP can be seen in its ubiquity, it has become the pre-eminent measure of economic and, to a large extent, social well-being.

Gross National Happiness (GHN) on the other hand, which has been attributed to the former king of Bhutan, is seen more important than ‘Gross Domestic Product’ The former monarch is said to have made GNH the guiding philosophy of Bhutan’s development process, soon after his enthronement in 1972 (Thinley 2007). However, it was not until the late 1980s, that the king began to use the GNH concept openly in an attempt to ensure that economic development was in harmony with Bhutan’s culture, institutions and spiritual values (Ura and Galay 2004).

Introducing Bhutan and GNH to outside ideas and institutions began in the early 1960s, and apparently picked up pace in the 1970s (Ura and Galay 2004). In that context, the GNH concept probably evolved as good-humoured play on words to make the point that the development process ought not be directed toward increasing GNP if this is at the expense of traditional values.

Some critics have had difficulty in accepting the GNH concept. This is mainly due to the word ‘Gross’ as in GNH this does not appear to have any meaning, where in GNP it does, it also does not have a meaning corresponding to that in national income accounting.

However, this has not prevented the GNH concept from becoming a national objective in Bhutan. Article 9 of the Constitution of this new democracy states:

‘The State shall strive to promote those conditions that will enable the pursuit of Gross National Happiness’.

Furthermore, GNH has been debated around the world for many years. Nevertheless, it has received overwhelming support and encouragement from all over the world, be it scholars, educationists, politicians, researchers alike. In addition, GNH is widely discussed internationally. At least four international conferences have been held specifically on GNH, attracting participation by scholars from different disciplines and different parts of the world. (Ongmo, S Dec 2009)

b)

The reason for the overwhelming support and sympathy that the GNH concept is receiving worldwide is that the citizens everywhere are dissatisfied with the way societies are progressing currently in the world. They are increasingly concerned with their quality of life where GDP is the sole yardstick used for measuring social progress prompted by globalisation. Now people are demanding for more sustainable and complete approach to development taking into account dimensions such as social, environment and culture into policy framework. Comments such as the below have been made which is making GNH the next phenomenon. ‘Our industry should be boosting gross national happiness’’ (Pollard, I 2008)

In this context, GNH challenges the one sided measure of social progress using GDP as the only indicator. The Bhutanese government refuses to consider GDP as a good indicator enough to measure development. It argues that GDP is simply a measure of the currency that switches hands and it doesn’t take care of the growing social problems and deteriorating natural resources of a nation. (Sonam Jamtsho, Principal, Peljorling MSS, Samtse )

In today’s age, we have mentioned GNH is a potential substitute for GDP. (Ray, Debraj (1998): Development Economics, New Delhi 1998.) As we have found that GDP has failed to measure on whether it has benefited the nation or not as its only focus has been on the on economy. Factors such as natural disasters haven’t been considered which could contribute to the GDP growth as it stimulates economic activities such as increasing demands for construction. Also I have fund that the measure of GDP isn’t accurate as there is fear that statistic errors along with pollution factors aren’t being included, which would affect the overall performance. GDP also fails to measure things like quality improvement, this is due to the fact GDP can only measure the price as value, but not the quality of goods being produced. Saturday, January 31, 2009, 17:19 Also when assessing the performance of nations, GDP is often the policy used to measure wealth. However, it fails to measure more delecate forms of wealth, which are maybe more important to the average persons well being. Harrell, E Sep 2009. Nevertheless, I have found that changes or adbating to different policies will be a real challenge as for example swapping our UK standard of living for that of an average Bhutanese citizen would be very hard to adabt . By Eben Harrell Wednesday, Sep. 16, 2009

In contrast, GNH has become a more complete indicator as it draws upon a broader set of social, environmental and health measurement. One of the GNH creators Lyonpo Jigmi Thinley states:

“We have to think of human well-being in boarder terms. Material well-being is only one component. That does not ensure that you are at peace with your environment and in harmony with each other.”

GNH aims to evaluate sustainability, wellbeing and quality of life. There are nine index variables and many different metrics, which it uses to measure GNH. For example some on the key measurements include total household income, the highest level of education, the value of voluntary work and unpaid housework, natural capital such as energy, air and water quality, sustainable transportation, levels of health and education, crime, pollution and recycling levels. However, GNH faces its own limitations. Certain elements which make GNH become possible such as happiness from love is in fact hard to be measured by a rare method as people have different perceptions towards what happiness really means to them. In addition, GNH is only an indication and does not solve the real problems. For example, after releasing GNH in Bhutan, the country still faces challenges such as poverty and alcoholism.

It will be argued here that the happiness revolution might, instead of bringing about the return of “utility,” ultimately condemn this concept for being simplistic, and reveal that subjective well-being cannot serve as a metric for social evaluation without serious precautions. Fleurbaey, Marc(2009)

However, no measure has yet be proven to be perfect as the concept of GDP has risen concern of why the world measuring its development, progress and even sense of success by the GDP, if it does not properly account for the things that are beneficial or destructive to society. After all, the economy is just the exchange of goods and services that are meant to enhance the standard of living. Economist Alan Greenp, and even the inventor of GDP, Simon Kuznets, warned about using GDP to measure well-being and prosperity (Haggart, 2000).

Policy makers and Nations such as the U.S have intended to make positive changes to improve the structure. U.S have requested the Bureau of Economic Analysis (BEA) to revise the way it measure’s GDP levels and growth. One of the changes consisted of switching to a chain-weighted method of computing aggregate growth which depends on the current price information. This allowed BEA to measure GDP growth more accurately by using a new, “chain-weighted” procedure which would eventually eliminate upward biases in the incoming data. This indicates that challenges have been reconised when gathering accurate data for GDP and that policymakers are to some extent trying to make changes to enhance the method. However, study has shown that there are drawbacks which aren’t allowing the new measure to work as swiftly as it was intended to, as there has only been a small impact on the analysis of the macro economy. The new data, however, showed that the economy has been growing a bit less rapidly over the last few years than they had expected. The new policy also didn’t alter any estimates of the effects of monetary and fiscal policy on inflation, employment, and the budget and trade deficits. Key data on inflation, such as the consumer and producer price indexes, will not be changed, nor will the data on employment or the budget and trade deficits. On the whole, the most significant consequences of the revised GDP measurement system may be that growth in recent years will be marked down and the chronic upward bias to ongoing estimates of aggregate growth eliminated.

Policy makers have recognized that GDP successfully measures the national åconomic strångth, however, as discussed above ,GDP fails to measure things that ‘make life meaningful’. Morgan Housel – January 1, 2011. Collaborating GDP and GNH has been discussed in many states such as the U.S and the UK. Concepts of measuring both happiness and Gross are in talks, but research suggests that there is a lot of work involved, however, there are signs that they are working in the right direction.

A strategy in the U.K which many of us are aware of, track trends that affect the communities well being by using data from the census surveys where government agencies that track health, the environment, the economy and other societal barometers.

U.S on the other hand, are working with a research team at Princeton who are working with the Bureau of Labor Statistics to incorporate this kind of charting (census) into its new “time use” survey, which began last year and is given to 4,000 Americans each month. Dr. Alan B. Krueger, a Princeton economist working on the survey stated that:

“The idea is to start with life as we experience it and then try to understand what helps people feel fulfilled and create conditions that generate that,”

This method is intended to equip and educate the American quest for ever more income. But that benefit would have to be balanced against the problems that come with the increased stress imposed by additional testing.

“We should not be hoping to construct a utopia,” Professor Krueger said. “What we should be talking about is piecemeal movement in the direction of things that make for a better life.”

http://www.paradise-engineering.com/happiness/gnh.html

China on the other hand, started using, what is known to be a complex index called Human Development Index (HDI), that was established by Nobel Prize laureate Amartya Sen, which was then replaced by Gross National Product in 1990. China, who is another nation which is attracted to the concept of Gross National Happiness (GNH) as they found it an urgent necessity to move away from the GDP-led approach to a more human-centred style of government. The difficulties that many nations are facing that happiness cannot be measured.

The IEA, quite fairly argue that the satisfaction levels have not really gone up or down since records began in the 1950s might simply show that measuring happiness is a very imprecise science. As the authors point out, many happiness measurements are based on a three-point scale, with people asked if they feel unhappy, happy, or very happy.

“Basing government policy on such an imprecise measurement would be like the Bank of England’s monetary policy board basing its policy decisions on whether people say they are feeling poor, rich or very rich”, they write.

It’s not just rising income levels that don’t appear to affect happiness levels. Rising levels of violent crime also don’t appear to affect it. The high unemployment of the 1980s don’t seem to affect it. Nothing seems to affect it. It just continues in a straight, boring line. So what policy conclusions can we draw from thisNone, it would be fair to suggest.

The main problems identified were indicators such as the service input as defining and measuring has become very complex as Some business have mixed service departments in which trying to differentia could be a hard task. Also measuring non market goods such as housework and raising a family is also a challenge. GDP figures also exclude the making of goods and services that are not sold within markets. This component includes housework, meals cooked at home, and child care provided by parents, as well as services volunteered for charities and other groups. For example, when parents care for their own children, the value of their care does not appear in GDP. However, when parents pay for child care, those services appear in GDP.

GDP also includes only a very imperfect estimate of production of goods and services sold on the underground economy (or black market). This activity includes production of illegal goods and services (such as drugs and prostitution). It also includes production of legal goods that goes unreported to avoid taxes. Many estimates suggest that the underground economy in the United States amounts to between 5 and 10 percent of GDP; this figure is even larger in many other countries.

Conclusion

Also when renting a property the expenses appear in GDP as payments towards housing services, where on the other hand if you own the property GDP includes the government’s estimate of the rent that you would pay if you were renting. Also pricing of goods isn’t accurate as these are measured using old, higher prices, overstating the increase in the value of production. Research has also shown that double counting is also a major problem.

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