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Hdi and Gdp

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Difference people do difference things but have the same goal. That is to improve standard of living or human well-being for instead. So we need an index to indicate what we have achieved, what is the limitation that needs to be adjusted to orient the growth trend that makes the life better in the future. To meet up with this expectation, Gross Domestic Product (GDP for short) has been used as a method of evaluating the human well-being for a long time all over the world. But with the introduction of Human Development Report in 1990, the Human Development Index (HDI) has attracted great attention of policy and academic circles, as well as broader community around the world. This appearance also helps raising the question: Is GDP still an adequate measure of societal well-being and should it be replaced by HDI? This question has attracted a lot of people and cause a controversy among them. So let’s have a look at that matter of argument.
As you know the standard well-being varies from time to time, from place to place so we should at first understand: What is well-being? In general, well-being is the pursuit and fulfillment of personal aspirations and the development and exercise of human capabilities, within a context of mutual recognition, equality and interdependence. To make it more detailed here are some key criteria that we should include to valuate well-being: Material living standards (income, consumption and wealth); Health; Education; Personal activities including work; Political voice and governance; Social connections and relationships; Environment (present and future conditions); and Insecurity, of an economic as well as a physical nature.
That is the overview of well-being. What about the effectiveness of GDP in measuring societal well-being? To answer this question we should have a quick look at: How GDP covers overall the development of a country? Frankly to define, GDP is the market value of all final goods and services produced within a country in a given period of time. It basically has 4 components: Consumption(C), Investment (I), Government Spending (G) and Net Exports (NX) and its task is to look at the total income (which everyone is earning in the economy) and the total expenditure on the output of goods and services.
Therefore with only 4 components is it sufficient to fulfill comprehensively wellbeing’s factors? The answer is not. As the definition above, it is easy to find out that GDP is expressed totally in figure about consuming, investment, government purchase and net export. So how can it reflect the things that cannot be transferred into number such as health, quality of education, Political voice and governance; Social connections and relationships; Environment and so on?
Yet, the people who support for GDP debate that GDP does not include these things but all of them can be referred to by GDP. Because GDP is about the market value so in other word it measures the prosperous of a country. Therefore, a country with large GDP can afford better education; better health care or support for political voice and governance, strengthen the social connections and relationship (because people don’t have to keep in mind the self-interest) and expenditure on environment’s improvement while country with small one cannot. In short, GDP doesn’t directly measure those things that make life worthwhile, but it does measure our ability to obtain the inputs into worthwhile life.
However, whether or not you want to recognize, GDP also has some other drawbacks that are very popularity. Firstly, GDP doesn’t include household domestic and volunteer work. It means that all the chores and volunteer work you have done weren’t calculated into GDP because they are not expressed in term of money although they helped the social better. Moreover, it doesn’t concern the black market arena while this accounts for a considerable amount of money. Therefore, by excluding the black market value, the GDP has decreased a lot. In addition, GDP doesn’t measure quality of life or quantify human happiness. As you know, a person who experiences a happy life and unpolluted environment has less probability of catching diseases and joins a longer life. This fact also coincides with a better wellbeing. Next, sustainable growth is not accounted for by GDP. For example, a nation which is misappropriating investment or by over-exploiting natural resources can generate a significant amount of economic activity and thus boost the GDP. More importantly, an economy experiencing a stock or housing bubble with a low personal savings rate statistically appears to grow faster due to higher consumption, basically a nation mortgaging its future for current growth. You can see it clearly in the financial crisis in 2008. This crisis has generated bad effect on our economy up to now. Furthermore, GDP doesn’t take into account the trade surplus. As completely mentioned in the microeconomics, the trade surplus reflects the difference between the real value and willing to pay. Normally, people have the intention of pay higher than the real value of goods or services that leads to the consumer surplus that is not showed up in GDP. Last but not least, it doesn’t reflect the average standard of living of a typical person. A country which has large GDP may be due to the attribution of some wealthy people while almost citizens are poverty. This bias is unacceptable.
For all things mentioned above, we could easily see that GDP is not a good one to measure the societal well-being.
As mentioned above, Is Human Development Index (HDI), a new way of measuring development, more effective and should replace GDP? I assume it might be. HDI is a comparative standardized measuring development by combining indicators of leading a long and healthy life (health), access to knowledge (education) and a decent standard of living (income) into a composite human development index.
HDI reflects human development model while GDP illustrates development through economic model. The main purpose of HDI is to focus on ultimate objective of development, which is people’s well-being, not the economic growth alone. It contributes considerably to the understanding of the real position of society in several aspects. First, besides income, HDI measures education and health. It is more meaningful as a national average than income. As GDP only reflects national average income, it reveals little or not about how the people in society live and how that income is spent (on health, education, military expenditure…). So the expansion of HDI’s indicators is an advance aspect that HDI goes beyond GDP. In addition, HDI also shows that human development gap between nations could be reduced faster than gap in income. The difference between HDI and GDP ranking of a country show how successful it is, compared with other countries in translating the benefit of economic growth into the live of people. Comparing ranking on GDP and HDI, we could see the difference between nations’ rank. Many countries have high GDP, but low HDI indicators and vice verse, while some countries at the same level of GDP have different levels of HDI. If a country has HDI higher than GDP rank, they are headed in right direction and this country is building up an adequate base of human capital for growth. In reverse, if the HDI rank is lower than GDP rank, it means that the economic growth is not being distributed equitably among all sections of society. By looking HDI ranking among countries, we could see which country is combining economic growth with society development and which one is fail to do this. HDI, therefore, put pressure on Government to improve their performance if their neighbors do better.

Country | GDP per capita rank2002 | HDI rank2011 | GDP – HDI | South Africa | 69 | 103 | -34 | United State | 4 | 3 | -1 | Canada | 16 | 1 | 15 | Sweden | 28 | 26 | 22 | China | 128 | 99 | 29 | Table: Difference between ranking by GDP per capita and ranking by HDI

As all mention above, HDI can be a good tool of socio-economic at national level. It helps Government recognize the strength and weakness of a country – such as lack of education and employment in a particular group of people to address them accordingly. However, HDI has been criticized on number of aspects. First, the HDI has its limitations as a performance assessment tool with respect short-term objective. The HDI was created as measure of performance at certain point of time. So it does not allow us to judge the relative different components or to understand why country’s index changes over time. The main criticism is that HDI related to dimension choices – it does not include a series of issues such as policy freedom, cultural and environment. As for variables, it is also suggested that, besides life expectancy or education, infant mortality and other aspects like war, poverty should be taken into account in view to better characterize the human societal well- being of a nation. HDI, to some extent, may not be enough to illustrate perfectly the human society. Moreover, it might be harder to measure HDI, because it covers more aspects than GDP. It even more difficult to find reliable source of information as HDI is an international index. As HDI is more complex to collect data and calculate it correctly, many people argue that we should turn into an easier measure one- GDP. But frankly I think HDI is absolutely better than GDP, as it cover a more fully combining aspects of economic growth with society development.
In conclusion, I believe HDI will goes beyond GDP as a powerful tool for Government and policy makers to measure societal well-being.

REFERENCE Book | Principle of Economic | N. Gregory Mankiw | Web page | * Human Development Report * GDP: Gross Domestic Product Fails as an Indicator of Economic Welfare * HDI 2010: New Controversies, Old Critiques | HDI 2010: New Controversies, Old Critiques | Other sources from Internet | Research of many authors | * International approaches to measure wealth and well-being in the context of sustainable development – Nisida Gjoksi * Human Development Index and Its relevant for Developing countries – Khadija Haq * Two Decades of Human Development - Vignesh Ashok | Table and Data | | Total essay length: 1591 words. |

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