Assignment
GDP, technical progress and living standards what has been the overall effect of technological progress on economic well-being? The standard method economists use to address this issue has historically been to use the national income accounts to estimate the rate of growth of real GDP per person. Over the past 25 years this has grown at a little under 2% per year in the UK. Increasing awareness of the idea of ‘sustainable national income' (SNI) has led to proposals to adjust GDP measurement downwards to allow for depletion of natural resources and environmental damage. The idea here is that the loss of these ‘non-renewable' resources will make it more difficult for future generations to enjoy the same benefits as the present generation, i.e. the measure of value of current national income is ‘not sustainable'. The implementation of these adjustments is difficult - given the uncertainties involved in, say, identifying climate change and putting an economic value on the net impacts of climate change. But looking at recent trends in energy consumption, it seems likely that while the level of ‘sustainable national income' is less than that of GDP, its rate of growth is much the same. Whilst the discussion so far suggests that the GDP figure is an overestimate of SNI, on the other hand there are at least two reasons for arguing that it is an underestimate of SNI.
First, the contribution made by new goods and services which incorporate technical advances is seriously undervalued. This problem is particularly serious in the context of advances that give fundamentally novel benefits to consumers - for instance, computer applications and mobile phones. The Boskin Commission in the US found that UK growth has been underestimated by perhaps 0.5 to 1.0 percentage points per year since the 1970s because these new products give consumers more output for ever-decreasing prices. Second, a major gain in well-being has accrued through reduced risk of mortality. The empirical evidence shows that people value this highly, and estimates by Nicholas Crafts suggest the value of improvements since 1973 in terms of equivalent consumption may be about £8,000 per person at 1995 prices.
Incorporating these ideas into the national income measure would roughly double the post-1973 growth rate, raising it from 2% per year to about 4.5% per year from 1973 to the present day. This has two important implications. First, we are in danger of undervaluing the contribution improvements in technology have made to our standard of living. Second, our failure to include consumer valuations of increased life expectancy in conventional measures of economic growth is potentially skewing policy - say in favour of tax cuts, as opposed to increased health spending.
Question
1 Why might conventional GDP data be criticised for overstating the true increase in living standards?
2 Why might conventional GDP data be criticised for understating the true increase in living standards?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.