Regrettable Component Of GDP
By Hema Senanayake –November 13, 2015
Hema Senanayake
This is a period of time that most of the concerned citizens are interested in economics globally. This is especially true for Sri Lankans because the national budget debate of Sri Lanka would begin in this month. Therefore, this period of time is more appropriate to discuss about certain economic concepts which would have an impact on the people. Regrettable component of GDP (Gross Domestic Product) is one of such concepts.
During the budget debates which will take place in the parliament or outside the parliament as well, there will be special emphasis on the economic parameter known as GDP. The reason is that the economic wellbeing of citizens mostly related to the growth of GDP.
All economists agree that GDP is a fairly good measure of value of the total output (or goods and services produced) of a country within a given period of time usually within one year. But this measure of value of output has its own weaknesses too. One important and significant weakness is that GDP includes a component which does not contribute to the increase of economic wellbeing of citizens. That is the component we define here as the “regrettable component of GDP.” Why is this important?
Let us take an example. It has been reported that IMF has predicted that Sri Lanka’s GDP would be increased at a rate of 5 to 5.5% in the year 2016. Let us just assume that the said GDP increase would be resulted from the increase of the “regrettable component of GDP.” In the event, it means that there will be no increase in the general wellbeing of citizens. Unfortunately, as at now, this component of regrettable GDP is not accounted or calculated. Yet understanding about it might give policy makers, politicians and the general public to have an enlighten view in regard to the efficiency of the economy because regrettable component of GDP is at minimum in a highly efficient economy which ensures the highest wellbeing of the people. Let us investigate this matter further.
There are a few methods of calculating GDP. But most popular and common method of calculating GDP is by adding up four variables. So, we can write GDP = C + I + G + NE whereas, C = consumption, I = investment, G = government expenditure and NE = net exports. Do not worry about the calculation of GDP. Our focus here is to understand as to how and where the component of regrettable GDP is accounted. Let us take a couple of examples first.
The variable “G” is government expenditure in the above GDP equation. It means that if Rs.100 is expended by the government that Rs.100 will be added to the variable “G.” If this Rs.100 is expended on education or to provide additional health care by that amount the wellbeing of people would be increased. If this Rs.100 is expended to meet the expenditure of the Jumbo Cabinet, that too includes in the GDP under the variable “G.” Will the Rs.100 expended on Jumbo Cabinet increase the general wellbeing of our people? Most people of the country would say “NO”; hence, this is the component of regrettable GDP because the GDP is increased but no increase of the wellbeing of general public. Read More
