Differences between Gross Domestic Product and Gross National Happiness

Gross Domestic Product

Gross Domestic Product is a measure of the level of income yielded by an economy over a stipulated period – generally this time period varies between one quarter and a complete year depending upon the end period when data is published by the authoritative body. It is actually an estimation of the size of the market underlying the economy on the basis of goods and services sold in it through the specific time span. The size of GDP earned by an economy could thus be encompassed by means of the following identity –

GDP ≡ Consumption + Investment + Government Expenditures + (Gross Exports – Gross Imports)

This is essentially a flow measure that takes into account only productive activities though measures are adopted to avoid double counting; transfer of financial assets between hands is ignored while estimating the same (Wenzel, 2009, p. 11). In other words, only those goods and services produced or sold legibly in the domestic market are included in the GDP measure of an economy (Mankiw, 2008, p. 510).

Nevertheless, these productive measures also include activities which ultimately might contribute to the devastation of mankind and almost every form of life on earth. For instance, expenditures incurred as parts of security and safety measures such as those for defence or for scientific research which might create pollution, positively influence economic development of a nation. On the other hand, volunteering tasks that people engage themselves during periods of exigencies are often eliminated from channels towards development primarily because those works are not marketed. These factors could actually be regarded as drawbacks of GDP measurement which ranks material development atop that of social welfare (Zencey, 2009, par. 5-7). Factors leading to environmental degradation are some of the most vital factors which must not be ignored while assessing the quality of human life. One of the most important of such elements is the excessive use of fossil fuels which almost goes hand-in-hand with economic development though such activities could hamper the smooth flow of human life over time. In order to include these factors as a part of index for development, many organisations have suggested the use of complementary indicators which adjust the value of GDP in a nation in terms of environmental and quality of life aspects, which hints towards the significance of Gross National Happiness as a measure of economic development (European Commission, 2010).

Two other factors which characterise Gross Domestic Product are that they do not represent the allocation of resources across cross-section. In addition, the components underlying GDP do not include most of the factors used by an average individual, which is why it cannot be regarded as a measure of social welfare (Naess & Rothenberg, 1990, p. 112). In fact, a rise in income need not reflect a betterment in the standard of living as had been empirically found in many researches. An eminent one out of them considers the time-series of happiness in relation to an enhancement in the economic growth rates in Japan when it was recuperating from the shocks of World War II. Between 1958 and 1987, real per capita income of Japan was raised five times that was reflected through an increased production of consumer durable goods, though no considerable change in the average level of subjective well-being in the nation (Easterlin, 1994, p. 38-40).

Gross National Happiness

Gross National Happiness on the other hand, is a measure of the quality of living. The concept had been introduced by the Bhutan royalty in 1972 in alignment with the spiritual lessons from Buddhism which is largely the national religion of the economy. While GDP is a measure of economic development identified by a lion’s share of the Western world, GNH is the representative of the same in oriental economies like Bhutan. Thus Bhutan emphasises upon spiritual development through aiming to maximise Gross National Happiness rather than material development as recognised by the Western nations through optimising GDP (Crins, 2009, p. 155). Unlike GDP, Gross National Happiness cannot be measured quantitatively in an efficient manner. Most of the proxy variables which could be considered as components of the happiness quotient in an economy are subjective in nature. As Med Jones, President of International Institute of Management puts it, there are seven such qualitative factors which could be used to measure the amount of happiness an economy is enjoying at any point of time. These factors could be classified under economic well-being, environmental well-being, physical well-being, mental well-being, workplace well-being, social well-being and political well-being (Ra, 2010, p. 21).

Hence, basically speaking, Gross Domestic Product is only a component of Gross National Happiness, through economic development, as identified byHis His Royal Highness of Bhutan back in 1972. It aims at encompassing all factors which could ensure a smooth and uninterrupted social lifestyle. Commodities and services which could be availed in lieu of money cannot be regarded as an exhaustive set of factors which could ensure happiness. Moreover, the level of income could be regarded as an essential element in the utility function of an individual even though there are other factors such as environmental degradation, social malice such as crimes or divorces or unemployment, inflation, etc. which form a significant part of the same. These factors had been omitted while calculating Gross Domestic Product whilst level of utility which is a proxy of the degree of happiness in an economy includes them all (Tella & MacCulloch, 2005, p. 27).

Topic B: Problems in measuring Gross Domestic Product and Gross National Happiness

Prior to speaking out the problems in measuring GDP, it could be said that one of the most advantageous facts about the same is that it could be decomposed into a number of quantitatively measurable factors so that calculating GDP might not be impossible as such. But there remain certain issue which could be enlisted as follows –

The problem of estimating the size of domestic market through calculating the GDP of a nation could arise when prices of commodities are fixed through centralised government decisions rather than free operation of market forces.

A second issue is that about counting the same good twice. Hence, intricate measures should be taken so that the prices of raw materials are omitted when that of the finished good is included while estimating GDP (Taylor, 2007, p. 484).

Lastly goods or services which do not belong to a defined market environment often pose problems while estimation. This is the difficulty in case of informal sectors since the amount of production or earnings yielded by them are seldom revealed through conducting surveys as is the case for marketed goods. Hence, a large proportion of the economy is likely to stay hidden (Azam & Daubree, 1997, p. 27).

However, these problems are slighted when that of Gross National Happiness is brought to the forefront. A major setback in this regard is that subjective well-being cannot be measured efficiently through quantitative variables. Although many researchers have suggested way outs from the same, the truth is that no one has put forward a definite set of variables which could actually represent the level of happiness among the people in an economy. Most of these variables are subjective in nature and might lead to biased results in case that a survey is conducted. In other words, there is no benchmark against which the level of happiness could be measured or compared. An alternative could be to conduct a survey among people even though it might not lead to distinct outcomes. This is the reason why Gross Domestic Product is often considered as a proxy for measuring happiness in an economy despite the fact that it could only produce a poor estimation of the same.

Revisions in Government Policies and Business Strategies

The concept of Gross Domestic Product had been there since a long time imploring the national administrations of most economies to frame policies in order to improve the GDP position of a nation. However, as already discussed earlier and repeatedly proven by eminent researchers, social well-being cannot be included in GDP component of a nation though it could be synonymised with economic development of a nation. The concept of Gross National Happiness though had originated in Bhutan did not remain limited within its domestic premises but eventually gained popularity in major parts of the Western world. Many economies gradually made room for the incorporation of policies which could actually assure well-being of civilisation. However, it might not be considered a very smooth process to introduce such measures at a macro level which is why very often the task is entrusted upon the shoulders of business organisations. Thus, a shift in the definition of economic development with the introduction of the concept of Gross National Happiness not only led to revisions in government policies but also in business environments of many nations.

One of the most effective measures implemented by the national government of any nation is that about adjusting business tax rates. This is one of the ways through which a high economic growth rate could be ensured as the diagram alongside shows. For instance, if the business tax rates in an economy is reduced considerably, that would be reflected through an increased after tax earnings. A high after tax income could be beneficial for the employee who ultimately comprise of a nation’s population. Furthermore, a betterment in the after tax income position of a business organisation could induce it to produce more thus reducing the rate of unemployment prevailing in a nation. A restrictive monetary policy could produce similar implications as well through affecting the existing rates of interest (Madura, 2006, p. 94). Hence, most of the changes in government policies are likely to affect business houses first through which employees get affected. But improvements in GDP through measures such as this cannot affect the nationals in case those business organisations decide not to expand their production activities proportionately. On the other hand, the impact that nationals have over them is likely to create a substantial impact over the production process that business houses involve themselves in. Hence, government policies create an impact over the business environment of an economy as well as in the long term planning of the concerned organisation. There is another aspect in the fiscal policy as well which is likely to create an impact over the business environment of an economy. The taxation policy of the economy could be revised in a progressive manner so as to increase the happiness content among nationals and hence improve the business environment. For instance, people who earn higher should be made to pay a larger proportion of tax while it should be lower for those who earn less (Griffith, 2004, p. 1363). Such a strategy could lead to betterment in the degree of happiness among people thus leading to improvements in business environment of the nation.

Business organisations could also incorporate measures which could lead to betterment in employee feelings and hence serve in enhancing the long term position of the respective organisation. For instance, they could incorporate sustainability measures in their corporate governance structure so that their employees feel their respective companies to be responsible for the well-being of the former. In many of the case, business organisations offer insurance to the families of their employees apart from the employees themselves so as to increase their level of loyalty. Secondly, business organisations could be lenient on the taxation front of their employees so that the latter have a greater proportion of their income left over as the disposable proportion. These factors could actually enhance the feel good factor among employees thus nurturing their loyalty towards their respective companies. Hence, the companies could lay ensured of a robust employee base which could assist in their long term planning to enhance the volume of production of the company and eventually that of the nation.