2. Explain whether or not GDP is a good measure of development.?

Question

2. Explain whether or not GDP is a good measure of development.

Answer 1

GDP is widely used by economists to follow how the economy is moving, as its variations are relative quickly identified. However, its value as an indicator for the standard of living is considered to be limited. An alternative for this purpose is the United Nations' Human Development Index in which the GDP is a contributing factor in its calculation. Criticisms of how the GDP is used include:

GDP does not take into account the black market, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
This mainstream economic analysis ignores the environment, subsistence production and domestic work. The current system counts oil spills and wars as contributors to economic growth, while child-rearing and housekeeping are deemed valueless. The work of New Zealand economist, Marilyn Waring, has highlighted that if a concerted attempt to factor in unpaid work were made, then it would in part, undo the injustices of unpaid (and in some cases, slave) labour, and also provide the political transparency and accountability necessary for democracy. Also, when GDP is used as a measure of success over time, the amount of housework that was done 50 years ago compared to the present time is much greater. Thus, comparing GDP over time cannot take into account the changes in society and lifestyle.
It ignores volunteer, unpaid work. For example, Linux contributes nothing to GDP, but it was estimated that it would have cost more than a billion US dollars for a commercial company to develop.
Very often different calculations of GDP are confused among each other. For cross-border comparisons one should especially regard whether it is calculated by purchasing power parity (PPP) method or current exchange rate method.
GDP counts work that produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable amount of economic activity and thus boost GDP, but it would have been far better if the disaster had never occurred in the first place. The economic value of health care is another classic example - it may raise GDP if many people are sick and they are receiving expensive treatment, but it is not a desirable situation. Alternative economic measures, such as the standard of living or discretionary income per capita better measure the human utility of economic activity. See uneconomic growth.
Quality of life - human happiness - is determined by many other things than physical goods and services. Even the alternative economic measures of standard of living and discretionary income do not take these factors into account.
As the single most important figure in statistics it is subject to fraud, such as the usage of hedonic price indexing on official GDP numbers in the US, thereby creating investments out of nothing while statistically dampening inflation.[citation needed]
Cross border trade within companies distorts the GDP and is done frequently to escape high taxation. Examples include the German Ebay that evades German tax by doing business in Switzerland, and American companies that have founded holdings in Ireland to "buy" their own products for cheap from their continental factories (without shipping) and selling them for profit via Ireland - thereby reducing their taxes and increasing Irish GDP.[citation needed]
People may buy cheap, low-durability goods over and over again, or they may buy high-durability goods less often. It is possible that the monetary value of the items sold in the first case is higher than that in the second case, in which case a higher GDP is simply the result of greater inefficiency and waste. (This is not always the case; durable goods are often more difficult to produce than flimsy goods, and consumers have a financial incentive to find the cheapest long-term option. With goods that are undergoing rapid change, such as in fashion or high technology, the short lifespan may increase customer satisfaction by allowing them to have newer products.)
If a nation does not spend, but saves and invests overseas, its GDP will be diminished in comparison to one that spends borrowed money; thus accumulated savings and debt are not taken into account so long as adequate financing continues.
GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment. For example, the large deposits of phosphates gave the people of Nauru one of the highest per capita incomes on earth, but since 1989 their standard of living has declined sharply as the supply has run out. Oil-rich states can sustain high GDPs without industrializing, but this high level would no longer be sustainable if the oil runs out. Economies experiencing an economic bubble, such as a housing bubble or stock bubble, or a low private-saving rate tend to appear to grow faster due to higher consumption, mortgaging their futures for present growth. Economic growth at the expense of environmental degradation can end up costing dearly to clean up; GDP does not account for this.
As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received, and can therefore underestimate aggregate utility.
The annual growth of real GDP is adjusted by using the "GDP deflator", which tends to underestimate the objective differences in the quality of manufactured output over time. (The deflator is explicitly based on subjective experience when measuring such things as the consumer benefit received from computer-power improvements since the early 1980s). Therefore the GDP figure may underestimate the degree to which improving technology and quality-level are increasing the real standard of living.
GDP does not take disparity in incomes between the rich and poor into account. See income inequality metrics for discussion of a variety of complementary economic measures.
The limits of GDP (or GNP, a slightly different notion) can be summed up in the words of two critics. Robert Kennedy said:

The gross national product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and nuclear warheads... it does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials. It measures everything, in short, except that which makes life worthwhile.

The second critic, Simon Kuznets the inventor of the GDP, in his very first report to the US Congress in 1934 said:

...the welfare of a nation can scarcely be inferred from a measure of national income. If the GDP is up, why is America down? Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

Some economists have attempted to create a replacement for GDP called the Genuine Progress Indicator (GPI), which attempts to address many of the above criticisms. Many nations calculate a national wealth, a sum of all assets in a nation, but this again does not account for future obligations such as environmental degradation, asset bubbles, and debt. Other nations such as Bhutan have advocated gross national happiness as a standard of living. (Bhutan claims to be the world's happiest nation.)

Answer 2

GDP measures economic growth. GDP per capita, education and long life expectancy measure economic development. Growth can be without development.

Answer 3

Here is argument from those who say it is not:
http://en.wikipedia.org/wiki/Genuine_Progress_Indicator
http://www.rprogress.org/projects/gpi/