PROS AND CONS OF GDP AS A MEASURE OF ECONOMIC DEVELOPEMNT VERSUS HUMAN DEVELOPMENT INDEX…. What is more important?
What is progress if we cannot measure it? How do we know we are better off than a year ago if we do not have the standards to quantify our improvement? Do we share a common definition of progress? One person may define progress by the increase in his material wealth. To another, the attainment of a college degree or maintaining a healthy well-being may be more important. These are some of the many questions that emphasize the importance of measuring standard of living.
There is a big debate about how good an indicator HDI is compared to GDP per capita as a measure of development. Let us discuss HDI first…
Human Development Index (HDI)
The Human Development Index (HDI) is a summary measure of human development. It measures the average achievements in a country in three basic dimensions of human development: a long and healthy life (health), access to knowledge (education) and a decent standard of living (income). Data availability determines HDI country coverage. To enable cross-country comparisons, the HDI is, to the extent possible, calculated based on data from leading international data agencies and other credible data sources available at the time of writing.
The first Human Development Report introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the HDI. The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.
The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. The HDI can also be used to question national policy choices, asking how two countries with the same level of GNI per capita can end up with such different human development outcomes. For example, the Bahamas and New Zealand have similar levels of income per person, but life expectancy and expected years of schooling differ greatly between the two countries, resulting in New Zealand having a much higher HDI value than the Bahamas. These striking contrasts can stimulate debate about government policy priorities.
To reflect country-specific priorities and problems and to be more sensitive to a country's level of development, the HDI appearing in the global HDRs can be tailored so that additional components are included in the calculation. HDI adjustments should utilize the methods of weighting and normalization as the original HDI, making use of maximum and minimum values to create an index for the added component. In addition, indicator-specific weights can be tailored such that they reflect national policy priorities.
Additional adjustments to the HDI could involve expanding the breadth of existing component indices. For example, the life expectancy category could be adjusted to reflect under-five or maternal mortality rates; the income component could be adjusted to reflect unemployment, incidence of income poverty or the Gini-corrected mean national income; and finally the educational component can be adjusted to include the number of students enrolled in particularly important fields of study, such as the mathematics and sciences.
It is difficult to use the HDI to monitor changes in human development in the short-term because two of its components, namely life expectancy and mean years of schooling change slowly. To address this limitation, components that are more sensitive to short-term changes could be added to the national HDI. For example, the rate of employment, the percent of population with access to health services, or the daily caloric intake as a percentage of recommended intake could be used in place of the traditional indicators of the HDI.
Thus, the usefulness and versatility of the HDI as an analytical tool for HD at the national and sub-national levels would be enhanced if countries choose components that reflect their priorities and problems and are sensitive to their development levels, rather than rigidly using the three components presented in the HDI of the global HDRs.
As previously mentioned, when adjusting the HDI to reflect additional concerns, a commitment to data integrity and rigorous attention to statistical protocol should always be a concern of paramount importance.
HDI measures quantity and quality and includes life expectancy, literacy, and real GDP/capita. Objectivity is a major problem with any index. HDI is no exception. Assignment of weights is an example of arbitrariness without justification and the HDI index is sensitive to the weights assigned. A more serious criticism of the HDI is the weighting of each rank order of the country by 1/3 (LEI, EI, GDP) and summing the weighted ranking of the three indicators.
The flaw here is the problem of application of ratio scales on ordinal magnitudes. Economist Bryan Caplan has criticized the way scores in each of the three components are bound between zero and one, so rich countries effectively cannot improve their ranking in certain categories, even though there is a lot of scope for economic growth and longevity left.
GDP AGAINST HDI?
In the early 1930s, economist Simon Kuznets developed one such measurement - the Gross Domestic Product (GDP). This measures the size of an economy by adding up the value of goods and services produced within the country during a period of time. Using the expenditure approach, GDP is equal to Consumption + Gross Investment + Government Spending + (exports - imports), or, GDP = C + I + G + (X-M).
Most countries use GDP to measure standard of living. Economists, policymakers, international development agencies and even the media use it as an indicator of the economic health of a nation. The advantages offered by GDP is that it is widely and frequently used and its data requirements are readily available. Since the definition is common among countries, consistent comparisons can be made between and among them.
Certain activities that have a negative impact on the people's well-being could end up being recorded as positive contributions to the GDP. Take for instance, crime. Rising criminal activities can increase the country's GDP through greater expenditures toward maintaining law and order (e.g., hiring of additional police members, purchase of guns, prisons, etc). 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. The negative impact of deforestation is not taken into consideration. A further example is divorce. As divorce rates increase, so too does the related spending on litigation, lawyers' fees and the establishment of separate households. The emotional and psychological impact of divorce on the individuals concerned are not considered.
GDP is also criticized because it does not take into consideration other aspects that define human well-being like life expectancy and educational attainment.
SO WHICH IS MORE IMPORTANT?
When HDI is greater than GDP it reveals how development has taken the place of excess income, which no longer necessarily needs to be high, for opportunities of health and education are available to a larger extent to the nation as a whole. This can provide the nation with the development needed for the optimal growth, which would allow development to be sustained as growth continues.
When GDP is greater than HDI it reveals how production has taken the place of developing the population to the degree in which now fewer people have the access to education and health because the money is invested possibly back into the economy for growth to achieve some other objective than to increase the overall welfare of the public.
I would rather live in a nation with a high HDI, because with a highly developed nation, money is no longer the means by which things are valued. As a more developed nation, I would think that the more educated and healthy everyone was they would make wiser decisions that would start to include the marginal costs of their actions and do things the right way instead of producing to the extent in which more harm is done, i.e. to the environment, the health of the nation, the inability for the people to get an education to rise above the constraints set forth by an systematic structure whose primary goal is to have people function as a machine rather than living with the power to choose.