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GDP - An indicator of development

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General awareness or GK  is a must for cracking MBA entrance exams and for updating you on this, MBARendezvous.com -India's content lead MBA website  has started series of articles to equip MBA aspirants with general awareness with the hope that you would get success in various MBA entrance exams.

Following article on”GDP - An indicator of development ” is part of our series on general awareness: 

World over, GDP, the Gross Domestic Product is the most common indicator of development. Progress of each country is calculated by the increase in its Gross Domestic Product. GDP is the monetary value of all the final goods and services produced in a country in an accounting year. It is calculated by three methods-
 
1.Product method
2.Income Method
3.Expenditure method
 
Under Product method, national income is calculated by the summation of monetary value of all the final goods and services at market price in a year.
Under Income method, income earned by various factors engaged in the production of goods and services is added to reach the national income.  This provides the National income at factor cost.
 
Under Expenditure method, national income is the sum of expenditure incurred on the purchase of goods and services in a year.
 
Apart from GDP, other measures of national income are also prevalent like NDP (Net Domestic Product), GNP (Gross National Income), NNP (Net National Product) etc.
 
NDP can be calculated by deducting the depreciation from GDP i.e.NDP = GDP – depreciation
 
GNP is calculated by adding net factor incomes from abroad to the GDP i.e.GNP = GDP + Net factor incomes from abroad.
 
Net factor income from abroad is calculated by adding the incomes from export of goods and services and subtracting the income going out of the country through import of goods and services.
 
NNP is calculated by deducting the depreciation from the GNP i.e.NNP = GNP – Depreciation
 
All the aforesaid measures of national income are calculated at either market price of factor cost. 
 
GDPFC = GDPMP – Indirect taxes + subsidies.  
 
Since indirect taxes and subsidies alter the market price of the commodity, in order to know the share of factor of production in the price, indirect taxes are deducted and subsidies are added in the market price. 
 
Apart from factor cost and market price, national income is also calculated at current prices and constant prices. The GPD at current prices determines the GDP at the time of its calculation while GDP at constant prices is used mainly for comparison of GDP in different years. GDP at constant prices is calculated with the help of a base year. 
 
In this manner different measures of National Income are calculated as per the need of time. Though every country uses GDP to measure its progress but the concept is also criticized as it excludes many other indicators of development like welfare, health, education, inequalities, quality of environment. The basic idea behind the criticism is that the countries treat GDP growth as the objective of their economic development programme however the objective of development is to ensure better life to the citizens and GDP growth is just one means to achieve that objective. 
 
Suppose if the GDP of a country is growing by 8 percent per annum but the population of the country is growing by 2 per cent per annum then the per capita GDP of the country is increasing by only 4 per cent per annum. Moreover, if the prevailing inflation is 5 percent, then the real per capita GDP is in fact decreasing by 1 per cent. Thus even on purely economic basis, real GDP per capita is the better indicator of progress than just GDP growth. 
 
Even the real per capita GDP is blank about the distribution of GDP. Even if real per capita GDP is growing at more that 8 per cent per year but most of this increase is cornered by elite section leaving bulk of the society in the quagmire of poverty, then it cannot be called as development by any means. Therefore many intellectuals call for the replacement of GDP by other to indicators to measure the level of development.
 
One such index is Physical Quality of Life Index (PQLI) developed by Morris de Morris by including non-economic factors like Infant Mortality rate, life expectancy at age one and literacy rate. Though GDP is not the sole representative of development but it is indeed one of the indicator of development and therefore exclusion of GDP from any development index is also prone to criticism as the as the development on the basis of GDP only.
 
In order to correct this flaw, United Nations Development Programme (UNDP) came with Human Development Index (HDI) which includes both, economic as well as non economic factors to measure the development.  The index includes GDP per capita at Purchasing Power Parity (PPP), adult literacy rate as well as primary, secondary and tertiary enrollment ratio and Life expectancy at birth. GDP per capita takes care of economic well being, while Life expectancy and literacy rate details the health of the society as well as skill development in the society. In 2011, India was ranked at 134 out 187 countries in terms of HDI; indeed a poor show! Though HDI may have some share in criticism but it is most widely accepted indicator of development as it treats human development as the ultimate objective of development. Apart from HDI, UNDP releases other indices also like Gender Inequality Index, Multi Dimensional Poverty Index, Inequality adjusted HDI etc. 
 
The incompleteness of the GDP to delineate the development had given rise to the other measures of development. In the latter half of the 20th century, many countries witnessed high level of GDP growth but were still lacking the effective human development. This further caused disillusionment of GDP approach. But few economists feel that there is nothing wrong in the GDP approach. They feel that absence of development despite of high GDP growth is not because of concentration of planners on GDP growth but it is because the growth was not as high as it should be to develop. Moreover, it is also very hard to conceive for a country to develop without a rise in the GDP.
 
How a country can increase its expenditure on health and education without an increase in its national income. So it can be concluded that though GDP is not a sole indicator of development but indeed it is a necessary input for development. In other words, GDP is necessary but not a sufficient to usher development.   
    
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