Define economic well-being, Net National Income, and Gross Domestic Product. How well does Gross Domestic Product measure economic well-being?

Define economic well-being, Net National Income, and Gross Domestic Product. How well does Gross Domestic Product measure economic well-being?

This question wants to find how well does Gross Domestic Product measure economic well-being. The question starts with the definition of economic well-being, Net National Income as well as Gross Domestic Product.

According to the Council on Social Work Education (2016), economic well being is possessing the present and future financial security. The present financial security refers to the ability of communities, families, and individuals to comfortably find their basic needs: food, utilities, housing, clothing, and education. Additionally, present financial security includes employment pursuits, finances, and having power over daily finances. Future financial security comprises the ability to take up economic shocks, build financial assets, meet business goals, and further maintaining an adequate income. Council on Social Work Education (2016) argues that communities, families, and individuals may accomplish economic well being. This can be in the form of public policies that ensures the ability to acquire financial skills and knowledge. Also, there is access to affordable and safe financial-economic and product resources. Furthermore, economic well-being gives chances for secure employment with sufficient benefits and compensation for all.

Gray (2018) defines Net National Income as the gross national income, less depreciation of fixed capital such as machinery, physical infrastructure, building, among others. Net National Income accounts for all income made by citizens of a particular country and foreigners residing in that country, plus wages, property income, and salary from abroad less the depreciation. In Net National Income, Income produced means services and goods, including taxes and investments (Gray, 2018). However, Net National Income takes direct taxes only. It is the taxes given to the government straight such as income tax. Moreover, the NNI excludes indirect taxes, such as taxes paid to the vendor by the consumer.

Net National Income is described as one of the precise methods of national accounting. It yields the most accurate country’s total income estimation as well as the economic growth rate. Net National Income forms the basis of GNI and GDP the two commonly used national accounting methods that give a rough estimate of a country’s economy. NNI is an efficient economic indicator of the overall well-being once measured per capita (Gray, 2018).

Gross domestic product (GDP) is the total sum market prices or values of all final services or goods produced by the country’s economy, excluding the cost of the services and products consumed in the production process. GDP is also equivalent to the sum of gross private domestic investment, net exports of goods and services, individual consumption expenditures, total private domestic investment, and government consumption expenditures and gross investment. In this, products are accounted for irrespective of their usage. GDP does not consider the producer of services or goods, producers can be either citizen or foreigner, but within the borders.The current concept of GDP was developed by American economists and later adopted as a primary measure of the economy in a particular country. Although goods and services in GDP are for sale in the market, they also include some non-market production such as education and defense that are provided by the government.

GDP can be described in production approach where at the end of each production stage there is a total value added together. This is total sales less the value of inputs in that process. For instance, flour is the immediate input while bread will be the final product. Another approach is the expenditure which is the total value of purchases made to the final product. The other approach is the income approach which is the total value created by production.

Gross Domestic Product has been utilized by economists and analyst to determine economic well-being. It gauges the impact of deflation and inflation as well as the growth of economy. When GDP grows exponentially over sequential quarters it shows healthy economic well being (Financial Times, 2014). If economic and GDP growth continues, this could indicate risky inflation. In such occurrences GDP helps policymakers to act accordingly to abate effects of such growth. Again, negative GDP over some consecutive quarters signals recession which indicates unstable economic well-being. At this point, there is a need to lower interest rates, print more money or increase economic activities (Financial Times, 2014).

As a measure of economic well-being it comes with different opinions. Some economists argue that GDP is a good measure to gauge economic well-being because it measures the expenditure and income of individuals. Moreover, it shows the reality of an average individual, therefore indicating the living standards in a particular country (Gans et. al., 2012). However, it only act as an indicator since there are no details concerning produced output to help improve these standards. Although, GDP is used as economic well being gauge, it is ineffective way to assess economic well being of a particular country. This is evident when GDP does not account for economical damages like devastation of the nature and air pollution caused by economic growth (Sloman and Garratt, 2010, p.262). Another instance is the mother’s childcare at home. Although, this impacts quality of life, GDP does not account for it. Indeed, breakups and accidents increases the GDP because these increases the output of garage, lawyers, breakdown services. These illustrations indicates that, as far as GDP is concerned in measuring economic well-being, many social concept are excluded in the GDP calculation (Sloman and Garratt, 2010, p.262).

Also, the main aim of companies to an economy is to sell their services and products to customers. Here, customers could be categorized into four categories: firms, governments, households, and the foreign sector (McDowell, 2009, p.462). Similarly, this corresponds to the four groups of expenditure: investment, government purchases, consumption, and net exports (McDowell, 2009, p.463). Connecting these expenditures with the GDP is important to determine whether GDP just focuses on the services and products or amount requested by the user groups. Analysts speculate that all services and goods produces in a specific time will be requested by at least one of the named groups (McDowell, 2009, p.463). Consequently, the amount of the services and goods produced is equivalent to the demanded services and goods. Correspondingly, the output of these groups of customers impacts the GDP. Therefore, we are interested in the ways that these is considered in calculation of the GDP. Generally, there are various ways of measuring GDP. One of them is computing the overall spending on locally produced services and goods. This gives GDP equals investment plus government purchases plus consumption plus net exports (Sloman and Garratt, 2010, p.262). This results to a perfect measure to highlight the economic economic well-being of a country since it comprise the four determinant factors in its calculation. However, GDP is also judged as it leaves some facts like income distribution as well as environment effects caused by the economic growth (McDowell, 2009, p.463).

However, GDP is not efficient in measuring economic well-being. Since the GDP requires market prices to value services and goods, It excludes some facts that contributes to quality life. Furthermore, it excludes other activities that works outside markets. Particularly, GDP excludes the value of services and goods made at home. When meals are made to be sold at restaurants, the value is included in the GDP while the same is made for the family, this is not accounted in GDP (Cliffnotes, 2019). Furthermore, GDP does not account for income distribution. 100 people earning $50,000 annually has $5 million GDP. Surprisingly, GDP per person is not $50,000. So does in the group 90 people suffers with nothing while 10 people earns $50,000. Only few people would consider these two instances as equivalent. Gross Domestic product per person represents average person case, but personal experiences lies behind this average (Cliffnotes, 2019).

The standard of living is also an estimator of the present financial risk. GDP is a useful concept when estimating the growth and magnitude of a country’s economy. An important fact to study is how GDP is linked to the standard of living when measuring economic well-being (Khanacademy, 2016). After all, the standard of living matters a lot compared to the economy itself. GDP per capita, occurs when GDP is divided by the population number. It represent individual’s amount of GDP on average. Therefore, providing a reliable gauge of standard of living. As GDP is equivalent to the national income, GDP per capita is the income of a particular individual. This amount is directly related to standard of living. Generally, the higher GDP per capita indicates higher standard of living in a country translating to stable present financial risk (Khanacademy, 2016). When determining standard of living GDP per capita is more reliable gauge than GDP. If a country possesses a higher GDP and a large population, each individual in the country may be having low income hence may live in poor situation. Contrary, a country with averaged GDP and a small population means high personal income (Khanacademy, 2016).

According to Theory and Application of Microeconomics (2012), Trends in the value of non-market facts could result to a wider gap between household well-being and GDP such that alteration in calculated GDP may not proxy for effect in well-being over the longer run. For example, the rush of women into the labor force in the 1970s, 1980s, and 1990s would have increased GDP even if recently employed women were previously producing the same magnitude outside of the marketplace—an instance in which the growth in GDP would have exaggerated the growth in well-being. However, some current trends would go in the other direction. For example, the internet has made it easier for people to set up travel straight instead of going through a travel agent—these personal efforts to book travel are not included in GDP but the services of a travel agent would be accounted for, directing GDP growth to minimize increase in well-being.

Lastly, with the complexity of the businesses in the modern world, it is quite challenging to determine or measure economic well-being. Currently, calculation of GDP only holds with the main treats of an economy when the minor ones are left out. Thus, it is enough to make statements about its magnitude. However, it covers some specific activities. Especially social facts are not accounted for in this calculation. Due to these shortcomings of GDP as a gauge of economic well being, economists and statistical agencies should continually research to evolve new complementary estimators that will entirely capture economic well-being. Nevertheless, in using GDP together with other standard it is definitely a good gauge to assess the financial well-being of any region.