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: Hong Th Thu Hng A21 1111340207 Nguyn Th Thu Trang A21 1113340149 L Th Thu A19 1113340229

Class: A19 & A21 Finance and Banking Department Tutors: Mr Hoang Tuan Dung.

Hanoi, October 20th, 2012

Table of contents.

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./.

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 nations 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 as wheat, 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 by changes 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.

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 country worldwide. 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 countrys 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

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,

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 economys total income and the economys 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 wellbeing. 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 . As stated 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 are important 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 multidimensional concept 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 shortterm. 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, which reflect 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 wellbeing. 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 Dng Thiu Tng 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 just valuable 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 include habitual 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, 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. Mr. Hoang Tuan Dung, our teacher of

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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-indexcat/ Dr. Dng Thiu Tng 2004, Ch s gio dc Vit Nam: cao hay thp?, Vit bo, viewed 20 October 2012, http://vietbao.vn/Giao-duc/Chi-so-giao-duc-Viet-Nam-cao-haythap/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 nations income, p. 206, South-Western Cengage Learning, USA. Nghin cu kinh t hc n.d, Kinh t hc : Cch tnh ch s pht trin con ngi 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/bgdpsummary-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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