What is the best way to measure economic welfare?

The following article is a copy of an essay I submitted to the Immerse Essay competition at the start of the year and was highly commended for and won one of their partial scholarships, awarded to 7% of the total 5000 entrants.

Essentially, the nation’s level of prosperity – economic welfare must be measured to help governments determine future policies and the effectiveness of previous policies. Without quantifying economic welfare, it would be impossible to prevent costly and irreversible policy decisions, so it’s vital to use the best possible measure. In my discussion, I will explain the shortcomings of other popular measures and explore the three inputs of the Human Development Index and why each one is necessary. I will then conclude that although the HDI is flawed, it is the best method as it is well-balanced and allows a straightforward comparison of economic welfare between countries.

Economic welfare can be assessed with various techniques, each concentrating on different factors – GDP per capita is more quantitative and often used to measure average income. However, it could be misleading without considering income inequality. A bracket of hyper-wealthy individuals in an impoverished society can skew the value to create false conclusions, misrepresenting the nation’s financial health. Alternatively, qualitative methods, such as the happiness index, are very subjective, as people have different interpretations of happiness. It uses normative judgements on whether people are happy and does not include tangible indicators of prosperity. Therefore, it is crucial when selecting the optimum measure of economic welfare to ensure that it is well-grounded while maintaining accuracy and validity. The HDI combines education, health and income to provide a holistic view of a population’s economic welfare and allows comparison of countries based on development. It produces a clearer image of economic welfare than individual measures due to its multivariate aspect, taking into account different perspectives.

 Firstly, education shows potential economic growth – with a high education rate, more skilled labourers will be available in the future. This means it is an essential indicator of economic welfare; thus, it is measured using the mean and expected years of schooling, allowing the HDI to accurately assess economic welfare from a skills-based perspective. Furthermore, differentiating between less and more developed countries is possible, as the latter are more likely to have expensive, publicly-funded mandatory schooling programs.

Economic welfare also relies on people working and interacting, so health becomes a key factor. Frequently ill employees cannot work as often or as productively – as evidenced recently – negatively impacting economic welfare, but other measures often overlook this. However, the HDI accounts for this using life expectancy, allowing us to assess the country’s healthcare system from early deaths and the availability of care to live longer.

The final element is income, represented by GNI per capita. Economic welfare is essentially the general standard of living, and it relies on people being able to buy goods and services to enrich their lives. Consequently, an indicator of purchasing power is essential in the index, and GNI per capita fits this role perfectly, showing the average income based on purchasing power parity.

As its inputs are not substantial individually, HDI can be flawed like other measures; however, using three crucial variables prevents the discrepancies caused by using only one. Combining them provides a well-grounded and accurate overview of an economy and the standard of living of its citizens, enabling us to rank countries from high to low development better than in other measures, and generally, this is a valid indicator of economic welfare.


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