Measuring development

 There are several measures of development that are known, such as: GDP, HDI, GNP and the list goes on. There is a continuous argument based upon which is, objectively, better. So, I will divide this blog into 4 sections: 

• GDP 

• GNP  

• HDI 

• Comparison 

To discuss which measure of development is the best. 

 

Gross Domestic Product (per capita) is by far, the most well-known one, this is because governments like to use this figure to show economic prosperity. GDP is calculated by adding up all the money spent by consumers, businesses, and government in a given period of time. Alternatively, it can be calculated as all the money received by all the participants in an economy (this measure is in time periods, usually annually or quarterly). This is great to show the health of a country’s economy and to compare the size of separate economies as well as to compare the same economy in different periods of time (to see the percentage change), also known as growth or decline of an economy. 

Therefore, GDP is undoubtedly useful, however it is not without its flaws, as it excludes any non-market transactions. GDP also is unable to demonstrate whether the growth of a country is sustainable or not and it is unable to measure any other factor which holds a non-monetary value, for example, quality of life and life expectancy. Furthermore, it is very easy to inflate the GDP figures. To demonstrate: there are 2 separate measures which can be used to measure GDP, the expenditure method and the income method. The expenditure method is used most frequently, and works through adding up the aggregate spending in an economy, and the other is calculated by adding up the aggregate income in an economy. The income method is not used because it gives a lower value. Therefore it is easy to inflate. However, GDP does not include anything produced in other nations that is owned by a local business. For example, Apple. Apple's phones are produced in China but it is an American business. This means that all of the value of the products contributes to the Chinese economy and not the American.

 

Gross National Product is another method to measure economic prosperity. It is an estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. Therefore, GNP is shown to use the circular flow of income, which is a concept based on households owning all the capital, labour and land and lending it out to firms to create products, in turn give the households money to purchase products from other firms. GNP largely overestimates welfare quality as in a congested area a house costs more than a big house in a relatively rural area. In this case the people in the congested house (in a city) would be shown to have a larger contribution to the GNP, than the people in the rural house, but would have a lower welfare. Therefore, GNP fails to measure welfare accurately. However, GNP measures the total value of products produced by local businesses, where they are made is irrelevant. Referring back to the previous example, Apple's phones would be calculated in the American GNP and not in the Chinese.

 

HDI or Human Development index is a measure of social development over economic development measured from 0-1, 1 being a high level of development. However, it is a fantastic method of measuring social development. HDI measures variables like life expectancy, education, and GNI (different to GNP, in short, it measures the national income of a nation from both firms and households). While HDI is a fantastic way to measure social development, it is not necessarily applicable for large nations with varying hotspots of economic prosperity as HDI is the average for all regions in a nation. For example, China has higher economic prosperity in the southern areas and lower prosperity in the northern areas. The average is given a rating of 0.761 which is not accurate for either the north or the south. Furthermore, as odd as that sounds, HDI cannot measure welfare, mainly because of GNI. Take military spending, this would be shown as an increase of the GNI therefore an increase of HDI, but welfare of the country may not have increased. 

 

Overall, GNP and GDP are based on economic activity, and their respective scale is what shows the country’s economic development. On the other hand, HDI shows the social development of a country. So first, I will evaluate GNP and GDP: GDP is by far the most well-known measure, which helps it achieve a better value than the GNP measure as it is widely recognised and can be used by almost everyone. For example, most countries use GDP as their figure of economic development because all the other countries use it and can be used to compare all different types of nations and economies combined. However, GDP doesn't measure a nation's total output by excluding foreign produced goods produced by a local business, GNP on the other hand measures the complete output of a nation. Therefore, only due to status, GDP is better than GNP. However, GNP should be used instead of GDP. This is due to GNP being the sum of all of the aforementioned income in the circular flow of wealth. Moreover, GNP accounts for any injections in the economy, more money in the economy, through 3 methods: exports of goods, in exchange for money; government spending, money previously obtained through taxes being inserted back into the flow of money; and finally, investment, this can be citizens or firms investing in a company or firms investing in capital (in the economic sense it means, “man-made tools to increase efficiency”). And GNP also accounts for leakages from the economy: taxes, savings and imports. Which all lead to money being withheld from a national market. However, GDP only outlines the net value of the services or goods from the firms being produced. And so, GNP gives a better portrayal of the scale of the economy than GDP. HDI shows development in a social sense, this means that the difference between the three is opinion based. So here is my opinion, HDI is a better means of judging development as it clearly shows how advanced the society is, and makes a general estimate on how active an economy is. However, GDP and GNP strictly only measure how active an economy is and how it is developing in scale. On the other hand, HDI doesn’t show the health of an economy but the health of the residents of a nation. In conclusion, if I were to judge a country’s development on one of these figures alone, I would, first and foremost use HDI. But if I were able to use several figures to show development, I would choose GNP to show the health of an economy and I would use HDI to strictly show societal development and exclude figures of GNI to get a holistic judgement of the nation.