Research(Final)

7/29/2019 Research(Final)

http://slidepdf.com/reader/full/researchfinal 1/15

FOREIGN TRADE UNIVERSITY

SKILLS DEVELOPMENT DEPARTMENT

RESEARCH

Subject: “Some people believe that Gross Domestic Product (GDP) is

aninadequate measure of societal well-being and should be replaced by

the Human Development Index (HDI). Do you agree with them?”

Group: Hoàng Thị Thu Hương – A21 – 1111340207Nguyễn Thị Thu Trang – A21 – 1113340149

Lê Thị Thu – A19 – 1113340229

Class: A19 & A21 – Finance and Banking Department

Tutors: Mr Hoang Tuan Dung.



Hanoi, October 20th , 2012

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Table of contents.

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Introduction

Social wellbeing has so far been the aim of every nation in every era. Lots of attempts have

been made, which created the race between many nations for the best national social wellbeing.

So what is social wellbeing ? According to the definition of the Oxford Dictionary of Geography

on Answers.com, social wellbeing is “A state of affairs where the basic needs of the populace are

met. This is a society where income levels are high enough to cover basic wants, where there is

no poverty, where unemployment is insignificant, where there is easy access to social, medical,

and educational services, and where everyone is treated with dignity and consideration.” This

seems to be an abstract understanding of social wellbeing and then quite a difficult way to

evalutate the wellbeing of a nation. People need a quantitative assessment of this to make it more

concrete and measureable.

Over the last two decade, measurement of social wellbeing has seemed to be one of the

most crucial issues for almost all policymakers. Several studies have been published; academic

researchers, official statisticians and international organisations have proposed many

measures, which can be classified according to different criteria. A lot of indices came into

existence and successfully indicated social wellbeing to some extent. Among those are GDP and

HDI.“Some people believe that Gross Domestic Product (GDP) is aninadequate measure of

societal well-being and should be replaced by the Human Development Index (HDI)”. This is the

topic of our research. In this one, we would use lessons in textbook and our findings to prove that

statement.

During the process of doing this research, we spend special sincere thanks to Mr. Hoang

Tuan Dung, our teacher of Macroeconomics course, for his considerate guidance./.

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Contents

1. An overview of GDP

1.1. Definition

GDP is the abbreviation of Gross Domestic Production. It is “the market value of all final

goods and services produced within a country in a given period of time”(Mankiw 2008). Market

price is defined as the “amount people are willing to pay for different goods”. But they just

consider the market price of goods “produced in the economy and sold legally in markets”, which

means that things like illegal drug will not contribute to a nation’s GDP.

Moreover, the goods or services counted must be final ones, not intermediate ones. For

example in the progress of producing bread, some kinds of goods may be considered such aswheat, wheat flour, bread. But we should not count all of them because the value of wheat and

wheatflour have already been included in the value of bread. In this case we call wheat and

wheatflour intermediate goods, and bread the final one.

In addition, we have to be careful when consider the producing time and place of goods.

They must be produced currently within the territory of a country and in a particular period of

time.

1.2. The components of GDP

1.2.1. Using the Income Approach.

Using the Income Approach, we have:

Y = C + I + G + NX

In this case GDP(Y) is the total expenditure of the whole economy and made of 4

components: Comsumption (C), Investment (I), Government Purchases (G) and net exports (NX).

1.2.2. Using the Expenditure Approach.

Using the Expenditure Approach, we have:

NI = W + R + i + PR In this case, GDP is the total income of the whole economy and made of 4 components:

Wages (W), Rental income (R), Interest income (i) and Business profit (PR)

1.3. Real GDP and Nominal GDP. The GDP deflator.

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Real GDP is “a measure of the total quantity of goods and services the economy is

producing that is not affected by changes in the prices of those goods and services.”

Nominal GDP is “a measute of the total quantity of goods and services the economy is

producing at a current prices.”

In comparision between 2 kinds of GDP, we can see that Real GDP is not affected bychanges in prices. And after computing these two indices, we can take into consideration the

GDP inflator, which “reflects the prices of goods and services but not the quantities produced.”

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2. An overview of HDI

2.1. Definition.

As stated in ‘Human development index (HDI)’, human development index (HDI) is a

global index measuring health, education, living standard and other factors for all countryworldwide. It is a standard of social well-being, especially child-welfare.

2.2. The components of HDI.

HDI is calculated based on three basic dimensions of human development:

Health of country’s people is calculated by life expectancy at birth.

Education is measured by the adult literacy proportion and the combined primary,

secondary and tertiary gross enrolment ratio.

Living standard is measured by the Gross Domestic Product per capita (Purchasing Parity

Power in $US).

As stated in ‘About Human Development’ , the first Human Development Report was

published in 1990 with leadership from Pakistani economist and finance minister Mahbub ul Haq

and Indian Nobel Prize Laureate for Economics, Amartya Sen. This index has been used since

1993 by the United Nations Development Progamme.

HDI value (I) can go from 0 – zero development to 1 – the highest level of development.

According to Nghiencuukinhtehoc.com, HDI can be calculated as following:

Il is index of life expectancy with

Where:

Ie is index of life expectancy with

e1 is index of adult literacy proportion

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Where:

proportion

e2 is the combined primary, secondary and tertiary gross enrolment rate with

Where:

Ii is index of GDP per capita with

Where:

The value Max and Min of related indices are showed in following table:

Index Unit Max Min

GDP per capita (PPP-USD) USD 40000 100

Adult literacy rate % 100 0

Combined gross enrolment ratio % 100 0

Average life expectancy at birth:

+Female Year 87.2 27.5

+Male Year 82.5 22.5

Depending on this index, country and regions are grouped into three classifications:(According to ‘The human development index (HDI)’ and ‘Countries in the World Ordered by

Human Development – 2011’)

Low human development: I 0.499

Ex: Sudan, Zimbabwe, Liberia,…

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Medium human development:

Ex: India, China, Viet Nam,…

High human development:

Ex: United States of America, Japan, Australia,…

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3. Comparison between HDI and GDP

3.1. Similarities

Firstly, both HDI and GDP are the measure of social well-being. These indices express the

economic side, are the criteria to assess the rank of a country. Economists, policy makers,international development agencies and even the media use they as an indicator of the economic

dimension of a nation. Beside that, through the renovation of these ones, people can appreciate

economic development, the increase/decrease, the speed rise/fall, the stability or fluctuation of a

economy.

Secondly, both HDI and GDP can say nothing about the distribution of income. As we have

seen, GDP measures both the economy’s total income and the economy’s total expenditure on

goods and services. Is is a fact that all people in a rich nation has higher living standards than all

of those living in a country with lower GDP? A society in which 100 people have annual

incomes of $50,000 has GDP of $5 million. So does a society in which 10 people earn $500,000

and 90 suffer with nothing at all. But do these 2 societies have the same social well-being? With

the same GDP of $ 500,000 but which country you think has higher level of societal well-being?

It is of course the latter. Average income would remain unchanged, but the more equal society is

likely to generate more aggregate utility.

3.2. Differences

Up to now, there are so many research to find the best measure of social well-being, and

each research has its own opinion about this matter. However, all of these share the same idea

that GDP is a useful indicator of for measuring economics growth; but they also see its

limitations in measuring general societal well-being.

HDI is one of the best choices to replace or supplement GDP in measuring societal well-

being. As claimed by UNDP (United Nations Development Program), 20120, 28, “forefront of

the growing array of alternatives to gross domestic product (GDP) in measuring well-being” . Asstated in ‘Summary notes from the Beyond GDP conference – Highlights from the presentations

and the discussion’ 2007, this arguement has also been brought forward by the Commission

President Barroso in the “Beyond GDP” Conference (19-20 November 2007): “GDP is an

indicator of economic market activity. It was not intended to be an accurate measure for well-

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being”. Now comes into details of the differences between GDP and HDI to understand more

about limitations of GDP as well as advantages of HDI in measuring societal well-being.

3.2.1. Limitations of GDP

Firstly, it ignores non-market aspects (work from home, voluntary work) which areimportant to assess social well-being.

Because GDP uses market prices to value goods and services, it excludes the value of

almost all activity that takes place outside of markets. In particular, GDP omits the value of

goods and services produced at home.

For example, a person wants to earn more money by doing chores for others with a prices

of $ 5 per hours. She spends 2 hours a day, 3 days a week cleaning houses, washing, ect for a

man. Then, she can gain an amount of $ 30 per week. This amount of money is of course

included in GDP. But what happen if this girl got married to that man. She still doing the same

work, the same time (2 hours per day, and 3 days a week) or even more but the value she has

created is left out of GDP.

Similarly, child care provided in day care centers is part of GDP, whereas child care by

parents at home is not. Volunteer work also contributes to the well-being of those in society, but

GDP does not reflect these contributions. In short, GDP omit non-market aspects which help to

increase societal well-being.

A study of the European Parliament emphasized that well-being is as a multidimensionalconcept which should include not only the standard of living (based on national income

measures), but also other aspects, such as health, education, social relatedness, etc..

However GDP just reflects the total income of a country but excludes anything that make

life better. One is leisure. For instance that every company all over the world have a policy to

increase the working hour to 12 hours a day, and 7 days a week. Its means that the working hour

of a person will be increased by 28 hours a week. The total amount of product of that country will

definitely boost and as the result GDP will rise. But this situation will just remain for a short-

term. People need time to relax. They cannot work for all the week. They do not have enough

health or they want to spend more time for their children, their family as well. In the long- term

that kind of policy will have negative effects. The GDP cannot increase, even maybe slump

because of strikes or lack of labours, ect. Yet, despite the increase in GDP, we cannot know for

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sure that people will be better off because they are trading off. They put their health and spiritual

life in jeopardy.

3.2.2. Advantages of HDI

People usually say that money cannot buy happiness. You may be a millionaire but you

may not be a happy person. Therefore, in macroeconomics, we cannot base on only GDP, whichreflect only economics development, to measure social well-being. Besides economic issues,

knowledge and health or life expectancy is of course 2 important things that affect well-being.

So for what reasons education is included in the HDI and is it a index reflecting social well-

being. It is a fact that there is a strong relationship between education achievement and individual

income. Education is becoming a concern of the whole society. Many even want to study abroad

with an aim of approaching to modern and good-quality education system. What are reasons

behind this phenomenon? When people have better education, they stand better chances of

finding better job with higher salary, as a result, they have higher income and living standards as

well. If the whole society have high education index, of course, it can boost GDP. As can be seen

that almost all countries have high education index are in top of countries with high GDP, namely

America, Japan,etc.

According to Dr Dương Thiệu Tống 2004, the education here should not be understood

simply the skills to read or write the letter, most importantly education refers to the ability to

have a general knowledge and understanding of statistics in different ways, say to report,

document, etc. The UNDP even sees broader concept of the role of education. If education is justvaluable as “human capital” then it will be double- counting for the HDI because the

expenditures of schooling frastructure is already included in GDP, but the most important thing is

that education help people to lead a life of understanding and meaning, in which greater

knowledge is in itself an aspect of a good life (Anand and Sen 2000- The income component of

the Human Development Index). Education helps people to have better knowledge of social

issues and then have awareness of solving it. For example, through education people know that it

is better for a family to have only one to two kids. One more kid does not only bear financial

pressure but also not enough care of their parents, and then cannot ensure a good life in the future

as well. If people are aware of such problems they will give a helping hand and the whole society

will get benefits.

Similarly, the life expectancy also impact on social well- being. Only when people have

pleasure on both physical and spiritual life, they can live longer. Therefore, the high level of life

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expectancy of a country reflect not only economic development (because only when the economy

of a country develops, they have capital for health services) but also great pleasure of life.

Therefore, it is absolutely necessary to involve life expectancy index in the calculation of social

well-being, which HDI can show but GDP cannot.

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Conclusion

As can be seen, compared to GDP, HDI gives a better and more complete understanding of

social well-beings. Beside material life, which GDP per capital represents, HDI does also includehabitual life represented by life expectancy and education, which have strong impact on

residents’ pleasure. However, HDI is not a perfect measurement of calculating social well-beings.

In general, in many countries the authorizes are so aware of the importance of HDI that they have

some applications in policies or population strategies in both central and local level; however, the

application of HDI as a calculation measure of social well- being still faces some problems.

Firstly, there is limited as well as uniformed understanding of GDP. Secondly, there is no specific

plan for HDI calculation each year. Thirdly, there is no uniformed method. The cost for the work

of collecting data is also a problem. Last but not least, the statistical work, collecting data takes

long time; there are still no reliable and full sources. All of these above leads to the fact that HDI

still lacks reliability.

Our research aims to gain more knowledge of HDI and GDP, 2 terms that are very similar

to students whose major is finance and banking. Though we still do not have full understanding

of 2 indices as well as other indices that may contribute to calculate social well-beings to decide

which is best suitable, but our initial aim is achieved.

Again we sincerely thank to our teacher, Mr. Hoang Tuan Dung, our teacher of

Macroeconomics course.

Thank you for giving us a challenge but also a precious opportunity to do the first research

related to our major.

Thank you for your help and enthusiasm.

And last of all, thank you for all, our teacher.

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References

‘About Human Development’, UNDP, viewed 20 October 2012,http://hdr.undp.org/en/humandev/

Answers.com n.d, Social Well-being, viewed 20 October 2012,

http://www.answers.com/topic/social-well-being

‘Countries in the World Ordered by Human Development – 2011’, Human Development

Index ,viewed 20 Octorber 2012, http://humandevelopmentindex.net/human-development-index-

cat/

Dr. Dương Thiệu Tống 2004, ‘Chỉ số giáo dục Việt Nam: cao hay thấp?’, Việt báo, viewed 20

October 2012, http://vietbao.vn/Giao-duc/Chi-so-giao-duc-Viet-Nam-cao-hay-

thap/40043533/202/

‘Human development index (HDI)’, UNDP, viewed 20 October 2012,

http://hdr.undp.org/en/statistics/hdi/

Mankiw, N.G 2008, Principles of Macroeconomics, 5th edn, ‘Measuring a nation’s income’, p.

206, South-Western Cengage Learning, USA.

Nghiên cứu kinh tế học n.d, Kinh tế học : Cách tính chỉ số phát triển con người HDI (Human

Development Index) , viewed 20 October 2012,

http://www.nghiencuukinhtehoc.com/2011/01/cach-tinh-hdi-chi-so-phat-trien-con.html .

‘Summary notes from the Beyond GDP conference – Highlights from the presentations and the

discussion’ 2007, viewed 20 October 2012, http://www.beyond-gdp.eu/download/bgdp-

summary-notes.pdf.

‘The human development index (HDI)’, UNDP, viewed 20 Octorber 2012,

http://www.undp.org.bz/human-development/the-human-development-index-hdi/

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http://hdr.undp.org/en/humandev/


http://humandevelopmentindex.net/human-development-index-cat/


http://vietbao.vn/Giao-duc/Chi-so-giao-duc-Viet-Nam-cao-hay-thap/40043533/202/





http://www.nghiencuukinhtehoc.com/2011/01/cach-tinh-hdi-chi-so-phat-trien-con.html




http://hdr.undp.org/en/humandev/









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