Human Development Index: The New GDP?
GDP is an imperfect economic measurement. Could the Human Development Index be a viable alternative?
The most conventional method of measuring an economy is Gross Domestic Product (GDP), which is the total value of all final goods and services produced in a country over a certain period of time. GDP can be measured per capita, which measures total output per person, or it can be used to measure national growth as a percentage over time. However, critics of the GDP measurement argue it is an old-fashioned method of analysis. The idea was developed in between the World Wars by economists who wanted to assess the economic damage of the Great Depression and compare production capacities between nations. However, GDP only measures productive capacity in a nation, not overall well-being. As Robert Kennedy once explained, “[GDP] includes air pollution, cigarette advertising, ambulances, jails, napalm, nuclear warheads and armored cars for the police to fight the riots in our cities… Yet it does not allow for the health of our children, the quality of their education or the joy of their play… it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud to be Americans.”[1]
Another example of the inefficiency of the GDP measurement was explained by William Nordhaus, the Sterling Professor of Economics at Yale University. In the 90s, he wanted to investigate how accurately GDP depicts changes in living standard so he sought to measure the “price of light” over the past 200 years. When he calculated according to the one-dimensional analysis used in GDP, he added up the change in the price of materials needed to produce light over time, from candles to light bulbs. On this basis, the price of light went up 3 to 5 times between 1800 and 1992. However, what that system of calculation fails to capture is that each innovation in light production was much more efficient than the previous technology. He then changed his analysis to calculate in terms of cents per lumen-hour and discovered the price of light had actually fallen more than a hundred times over.
Over time, economists realized the inefficiencies of GDP and wanted to develop a system of analysis that paints a more accurate picture of an economy’s well-being. Economists who were part of the United Nations Development Programme wanted to create a statistic to shift the focus of development economics from national income accounting to people-centered policies. These economists thought people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. So they came up with the human development index, a summary measure that incorporates three key dimensions of human development: health, education, and living standards. Health is determined by life expectancy at birth, which is calculated into the life expectancy index. Education is determined by mean years of schooling and expected years of schooling, which is calculated into the education index. And living standard is determined by Gross National Income per capita, which forms the GNI index. These three indexes together are calculated into the Human Development Index.
Compared to GDP, the HDI has a greater emphasis on human development. It takes the quality of life into account, not just production capacity of a country. Education and health are considered as important to a country as economic power. GDP is considered a means to human development, but not an end. GNI per capita, which is essentially the average person’s purchasing power, is an important factor in calculating Human Development Index, but just one of several. The Human Development Index paints a more holistic picture of a country than GDP. For example, countries with the same GDPs can have vastly different HDIs. If two countries have similar GDPs but their HDIs are out of sync, it can help policy makers identify the fundamental issues in their countries that need to be addressed, such as education or health. Finally, it more accurately depicts changes in living standard over time. As a drastic example, if from one year to the next every employee in a country’s tobacco and weapons industry suddenly became academics or joined the health industry to treat people, find cures, develop vaccinations, etc. GDP might not improve very much. However, the Human Development Index would change significantly to reflect the evolution in the country’s development.
As mentioned earlier, GDP was developed as a statistic so economists could attempt to measure the extent to which the Great Depression hurt economic production and so that countries could estimate their relative power to one another. GDP was never designed to account for technological change or the quality of life in times of peace. Economists agree the GDP calculation is far from perfect but there are not many better alternatives. The Human Development Index is one that takes into account health and education, in addition to GDP.
Further Reading:
[1] https://www.jfklibrary.org/Research/Research-Aids/Ready-Reference/RFK-Speeches/Remarks-of-Robert-F-Kennedy-at-the-University-of-Kansas-March-18-1968.aspx
[2] http://hdr.undp.org/en/content/human-development-index-hdi