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E En nd dl le es ss s E Ef ff fo or rt ts s t to o M Me ea as su ur re e S So oc ci ia al l W We el ll l- -B Be ei in ng g






Students Name: Vu Thi Ngoc Thoa
Students ID Number: 1113340224
Class: A18 CLC TCNH K50








Hanoi, November 2012
Vu Thi Ngoc Thoa A18 CLC TCNH K50

2
T TA AB BL LE E O OF F C CO ON NT TE EN NT TS S

Introduction 3
GDP: General Facts 4
The Birth and Use of the HDI 6
Reading Between the Numbers 8
Conclusion 11
References 12


Vu Thi Ngoc Thoa A18 CLC TCNH K50

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I IN NT TR RO OD DU UC CT TI IO ON N

Social well-being has always been an issue concerning most governments in
the world. Organisations such as the World Bank or the United Nations periodically
publish rankings of nations in terms of living standards, education, health care and
so forth.
Gross Domestic Product (GDP) is one of the most commonly used indicators
of well-being. It is easy to see that countries with high income are more capable of
investing properly in social development projects to ensure high living standards
for their citizens.
However, in 1990, the Human Development Index (HDI) came into
existence and soon became more and more widely accepted as an indicator of
well-being. This index is formed not only from income but also from education and
health care levels; accordingly, it is considered to be more comprehensive than the
GDP and to reflect more aspects that influence life quality of a countrys citizens.
This essay will go through some very basic points about the two indicators
and make a brief comparison between the two subjectively.


Vu Thi Ngoc Thoa A18 CLC TCNH K50

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G GD DP P: : G GE EN NE ER RA AL L F FA AC CT TS S

What is GDP?
Gross Domestic Product (GDP) is the market value of all final goods and
services produced within a country in a given period of time
1
. The market value of a
good or service is the price at which it is traded in the market. Every dollar that the
buyer spends on a good or service is a dollar of income to the seller of that good or
service. Accordingly, the GDP measures not only the expenditure but also the
income of a country.

Components of GDP
Why is the GDP an indicator of social well-being?
From the definition above, it is apparent that the GDP is undoubtedly a
significant element affecting social well-being. The GDP is well connected with a
countrys wealth, which decides the level of material satisfaction of its citizens.

1
Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage Learning, United States of
America, p.198.
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From the side of production: because the GDP measures the value of all
final goods and services sold in the market, a country with a higher GDP
produces goods and services in larger quantities or with better qualities
to meet the needs of its citizens.
From the side of consumption: citizens of a country with a higher GDP are
able to purchase more and better goods and services as they have more
money in hand for consumption or savings to enjoy future consumption.
A high GDP brings people not only material satisfaction to people but
spiritual values as well. A family with a high income is able to pay for high-quality
education and health care, spend holidays abroad, purchase houses in safe and
unpolluted areas and so forth.
Below are three examples of countries with their nominal GDP and rankings
in 2011. Average citizens in these countries enjoy different standards of living
corresponding to their income.
Countries United States Costa Rica Tonga
GDP (2011) 15,094,000,000,000 41,006,959,585 435,589,200
Rank 1 83 184
(Source: World Bank)


Vu Thi Ngoc Thoa A18 CLC TCNH K50

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T TH HE E B BI IR RT TH H A AN ND D U US SE E O OF F H HD DI I

What is HDI?
The Human Development Index (commonly abbreviated HDI) is a summary
of human development around the world and implies whether a country is
developed, still developing, or underdeveloped based on factors such as life
expectancy, education, literacy and GNI (Gross National Income) per capita. Since
1990, the results of the HDI have been published in the annual Human
Development Report, which is commissioned by the United Nations Development
Program (UNDP) and is written by scholars who study world development and
members of the Human Development Report Office of the UNDP
2
.

Components of the HDI (Source: UNDP)
As seen on the chart above, the HDI is a combination of several indicators
which measure social well-being; thus, it is said to reflect not only social wealth but
also other human development aspects.

2
About.com Geography, HDI The Human Development Index.
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How does the HDI represent the level of social well-being?
Today, the HDI examines three basic dimensions to measure a countrys
growth and achievements in human development. The first of these is peoples
health. This is measured by life expectancy at birth and those with higher life
expectancy rank higher than those with lower life expectancy. The second
dimension measured in the HDI is a countrys overall knowledge level as measured
by the adult literacy rate combined with the gross enrolment ratios of students in
primary school through the college level. The third and final dimension in the HDI is
a countrys standard of living. Those with higher standards of living rank higher
than those with lower standards of living. This dimension is measured with GDP per
capita in purchasing power parity terms.
HDI values range from 0 to 1. Those countries with an HDI of over 0.800 are
part of the Very High Human Development group. Those between 0.700 and 0.800
are considered as High Human Development countries. Medium Human
Development countries include those with the HDI varying from 0.500 to 0.700.
Those that fall below 0.500 are the Low Human Development countries.
Below are some examples of countries with different levels of human
development as measured by the HDI.
Countries Netherlands Russia Vietnam Haiti
HDI (2011) 0.910 0.755 0.593 0.454
Rank 3 66 128 158
Group Very High High Medium Low
(Source: UNDP)

Vu Thi Ngoc Thoa A18 CLC TCNH K50

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R RE EA AD DI IN NG G B BE ET TW WE EE EN N T TH HE E N NU UM MB BE ER RS S

It is clear that income is one component of the HDI. While the GDP only
shows the scale of an economy, the HDI gives a multi-dimensional insight into the
countrys development, both economic and social.
G GD DP P H HD DI I
1
Fails to reflect income per capita,
affected by population
Adjusted for populations effect
(using GNI per capita)
2
Solely indicates economic power of
a country
Takes social development indices
into account
3 Does not reflect social inequality
Partly reflects social equality or
inequality
4
Is sometimes misleading as a
contributor to well-being
Is strongly correlated to the level
of well-being
1. This is relatively simple. The GDP does show the scale of an economy, but
fails to indicate the income per capita, which is an important determinant of well-
being. Consider this as an example (data from Word Bank and UNDP):
Countries China Switzerland
GDP in USD (2011) 7,318,499,269,769 635,650,112,360
Population (2011) 1,344,130,000 7,907,000
GDP per capita in USD (2011) 5,445 80,391
HDI (2011) 0.687 0.903
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As seen in the table, although Chinas GDP is more than eleven times as high
as Switzerlands GDP, its GDP per capita and HDI are incomparable to Switzerlands.
In this case, the GDP fails to portray the actual standard of living, conflicting with
the indication of GDP per capita and the HDI.
2. The GDP is a measurement of a countrys income, but the HDI means
more than that. It is an integration of economic and social indices, i.e. GNI per
capita, life expectancy and mean years of schooling. Income is no doubt an
important determinant of well-being; however, two countries with similar GDP and
population could probably show differences in the level of well-being, depending
on the effectiveness and efficiency of how governments use national income to
enhance the standard of living. Good socio-economic policies will make good use of
available resources to boost up the standard of living, while ineffective ones may
fail to improve social well-being though supported with favourable economic
conditions.
Robert Kennedy once said when running for president in 1968 that GDP
does not allow for the health of our children, the quality of their education, or the
joy of their play. It does not include the beauty of our poetry or the strength of our
marriages, the intelligence of our public debate or the integrity of our public
officials. It measures neither our courage, nor our wisdom, nor our devotion to our
country. It measures everything, in short, except that which makes life worthwhile,
and it can tell us everything about America except why we are proud that we are
Americans.
3

3. Inequality is whats masked by the GDP or GDP per capita. In a country
with serious social inequality, most income is earned by a small number of
wealthiest people. These people can afford a high standard of living which poorer

3
Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage Learning, United States of
America, pp.207-208.
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people can hardly reach. The GDP of a country like this may be high but indices like
mean years of schooling or life expectancy are probably not, since a high standard
of living is impossible for most population.
In 2010, the United Nations introduced the Inequality-adjusted HDI, a
measure of the level of human development of people in a society that accounts for
inequality. The problem of inequality has now been better represented, which
gives us a more accurate look at the level of well-being in different countries in the
world.
4. There are certain economic activities that have negative impacts on social
well-being but end up being recorded as positive contributions to GDP. The
countries with the highest GDP take the lead in terms of total economic activity
taking place within their boundaries. However, it does not necessarily mean that
their citizens are better off than the rest of the world in terms of overall well-
being. For instance, China is the number one emitter of carbon dioxide in the world
as a result of its high level of manufacturing and industry-related activities. While
this contributes to a high GDP for China, many Chinese people have to suffer living
and working in a polluted environment. On the contrary, this problem is counted
into the HDI of China as life expectancy of the Chinese decreases, thus lowering the
HDI.
GDP excludes leisure and human costs associated with the production of
goods and services. Only output matters; no allowance is made for how long and
how hard people work to generate it
4
. If two countries have the same GDP but
people in one country have to work in much more strenuous conditions than
people in the other, they cannot be considered to be of the same level of well-
being.

4
Gwartney, J.D., Stroup, R.L., Sobel, R.S., Macpherson, D.A. (2011), Macroeconomics: Private and Public
Choice, Thirteenth Edition, Cengage Learning, United States of America, p.160.
Vu Thi Ngoc Thoa A18 CLC TCNH K50

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C CO ON NC CL LU US SI IO ON N

Economists and statisticians work hard to build up indices like the GDP or
the HDI for what? It is because people need tools to interpret and assess a
countrys level of well-being and look for appropriate solutions. And yes, tools have
errors. Although the HDI has been demonstrated as more comprehensive and
directive than the GDP in preceding parts of this essay, there are certain well-being
problems remaining unreported. Any indicator, either the GDP or the HDI, should
only be viewed as a tool, not the actual situation it reflects.
In my opinion, the HDI has a lot of potential to be developed into a more
precise indicator of social well-being. If problems such as crimes, unemployment or
corruption can be measured and added to the computation of the HDI, I believe it
will more and more closely follow the actual development path of society.

Vu Thi Ngoc Thoa A18 CLC TCNH K50

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R RE EF FE ER RE EN NC CE ES S

1. Gertner, J (2010), The Rise and the Fall of the GDP, The New York Times.
2. Gwartney, J.D., Stroup, R.L., Sobel, R.S., Macpherson, D.A. (2011),
Macroeconomics: Private and Public Choice, Thirteenth Edition, Cengage Learning,
United States of America.
3. About.com Geography, HDI The Human Development Index.
4. United Nations Development Programme, Human Development Reports,
<http://hdr.undp.org>.
5. The World Bank, Indicators, <http://data.worldbank.org/indicator>.
6. Mankiw, N.G. (2012), Principles of Macroeconomics, Sixth Edition, Cengage
Learning, United States of America.