Real Gross Domestic Measures Production of Final Products

Real Gross Domestic Product measures the inflation-adjusted total or aggregate production of final products produced in a country during a period of time. The higher real GDP, the more productive the country is during that year. The more the country produces, the more goods and services its people enjoy for consumption and production. This usually means that the country has achieved a higher standard of living. There are a few instances, however, where a higher real GDP does not necessarily mean greater happiness or a greater standard of living. These instances include environmental concerns and issues related to lack of leisure time.

Environmental Concerns

If increased production is accompanied by greater amounts of pollution, then there is a trade-off. Environmentalists focus on this relationship, and claim that increased pollution and the depletion of natural resources lowers people’s standard of living. Environmentalists, therefore, support halting economic growth in order to preserve the environment, natural resources, and wildlife.
An alternative philosophy is that even though economic growth may lead to environmental damage in the short-term, it leads to a greater standard of living and, therefore, more resources to fight
pollution, in the long term.

Pro-growth advocates argue that economic growth allows us to find solutions to environmental and social problems. Technological advances in the development of alternative resources, the production of cleaner products (hybrid cars, computers that allow online communications, faxes, etc.), and the development of technology that conserves resources lessen environmental problems over time.

There is recent evidence that in industrialized countries, economic progress is best stimulated through freedom of competition and maximum opportunities for rewards to those who produce and contribute to technological advances. Certain government functions and regulations are essential for economic progress. However, in general, less government interference, fewer laws, and lower taxation, in the long run, have led to a more-prosperous economy and an improved environment.

On some issues such as global warming and the damage to rain forests, however, the jury is still out regarding how much climate change is caused by human activities and how much slowing economic growth will make a difference. In addition, the issue is complicated as serious effects from climate change may not be evident for many decades or centuries.

The Environmental Kuznets Curve

Simon Kuznets (1901 – 1985) was an economist who is best known for his initiative to more systematically collect data to estimate a country’s National Income around the time of the Great Depression (which then lead to the calculation of Gross National Product and the now widely used Gross Domestic Product). His “Kuznets Curve” illustrates the relationship between a country’s rising national income over time (as it experiences economic growth) and its income inequality. Kuznets claimed that as a country grows, it first experiences rising income inequality, and then falling income inequality. He came up with a similar curve for a country’s rising income and environmental degradation. The environmental Kuznets curve illustrates that as a country’s income grows over time, at first the environment deteriorates, and then improves. Most environmental scientists will agree with Kuznets that we have seen a decrease of some harmful particles (for example, sulfur dioxide, nitrogen oxide, lead, etc.) in industrialized countries over time. However, other emissions (for example, greenhouse gases) have increased over time, and in general, the use of energy, land and other resources has significantly increased over time in developing countries.

Leisure Time and Stress

Does a higher GDP lead to more stress and a lower standard of living, because workers work more and enjoy less leisure time? Is there a direct relationship between increased production and increased work hours?

Contrary to the popular belief that people work more now than ever before, the past several decades have seen considerable increases in the average worker’s leisure time. This has been accompanied by rising real incomes and GDP. An explanation for this is that as an economy becomes more productive, businesses can afford to pay workers higher salaries. Therefore, people can afford to cut back on their hours, enjoy more leisure time, and still earn enough to pay for all of their necessities and a few luxuries. Two effects discussed in Unit 2 are at work here: the income effect and the substitution effect.

The substitution effect makes working for a higher hourly salary more attractive relative to enjoying leisure time. This makes people work more hours.

The income effect gives people more income when they earn higher hourly wages. This allows them to work fewer hours and still pay their bills.

For the average worker in industrialized countries, the workweek has shortened. This is evidenced by the considerable growth in leisure time-related industries. In general, therefore, as a country’s real GDP increases, so does leisure time enjoyed by the average citizen. This means that most people’s income effects outweigh their substitution effects. This leads to a decrease in the average number of hours worked per person. For more information about the average workweek and actual statistics from the Bureau of Labor Statistics, visit http://www.bls.gov/news.release/empsit.t18.htm.

Even though most people’s income effects are greater than their substitution effects, not everyone chooses to enjoy more leisure time. Some individuals, tempted by financial rewards, choose to work many hours each week. These individuals’ substitution effects are greater than their income effects.