Economics Assignment: GDP vs Economic Well-being, Free Trade and Government Intervention

This economics assignment discusses the limitations of GDP as a measure of economic well-being, the classical view on government intervention in the economy, and the benefits of free trade. It argues that GDP is not a good measure of economic well-being and that the Human Development Index is a better measure. It also discusses the classical view that the economy will always move towards full employment equilibrium and that there are no reasons for the government to intervene in the economy. Finally, it argues that free trade is beneficial for participant countries and that tariff and non-tariff trade barriers lead to inefficiencies in the developed as well as developing countries.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student:
Name of the University:
Author note:

1ECONOMICS ASSIGNMENT
Answer 1
The thesis statement is if GDP is a good measure of economic wellbeing of a country,
such as, Australia. GDP is the monetary value of the total production of a country, occurred
within the geographical boundaries of the nation, within a given time, say, one financial year
(Decancq and Schokkaert 2016). From the definition of GDP, it is found that GDP measures
only the worth value of the goods and services produced within the boundaries of a country, but
it does not include any measures of economic well being. This is a major criticism of GDP, as it
addresses only in the increase in the total production, and increase in GDP does not necessarily
indicate an increase in quality of life, average years of schooling or life expectancy. Increase in
production may lead to activities that negatively affect the quality of life of the people, such as in
case of pollution. It also does not include any volunteering or unpaid work.
Economic well being is measured best by Human Development Index (HDI), which is
based on life expectancy at birth, GNI per capita and average years of adult education. Thus, it
can be said that economic well being of a nation goes far beyond of GDP. The total value of
production is one of the many factors that indicate level of economic welfare of a country
(Costanza et al. 2014).
GDP of Australia in 2016 was 1.205 trillion USD (World Bank 2018). The value of GDP
is quite low compared to many developed countries in the world. On the other hand, the HDI
score was 0.949, placing the country in the 2nd rank among all the 177 countries of the world.
Australia maintained this position for consecutive three years, from 2014 to 2016 (smh.com.au
2015). This indicates that, Australia has a high quality of life, with higher life span (82.5 years),
20.4 years of expected schooling and 13.2 years of mean schooling, and 42,822 (2011 PPP
USD). Hence, it can be said that, the total production of Australia does not reflect the economic

2ECONOMICS ASSIGNMENT
well being of the country. GDP can be used only to measure economic growth but not as a
measure of economic well being.
Answer 2
The thesis statement is that the economy will always move towards full employment
equilibrium and hence there are no reasons for the government to intervene in the economy.
Classical economist J. B. Say introduced the Law of Markets, in which he stated that supply in
the market always creates a demand for its own. He stated that in the market, there will not be
any overproduction, or unemployment due to excess supply as there is always exchange of
money for buying and selling of produced goods and services (Ahiakpor 2017).
Market is an institution, where exchange of goods and services takes place against
money. In a free market economy, the system takes place on its own and needs no government
regulation for controlling. According to the classical economists, the market forces stabilize
themselves when there is any disturbance in the economy and reaches to the equilibrium position
without any external forces. This phenomenon is termed as ‘Invisible hand’ by Adam Smith in
his 1776 book, ‘The Wealth of Nations’ (Keynes 2016).
In this context, Sowell (2015) states that, when there is additional production in the
economy, sufficient purchasing power is also generated for absorbing the extra supply in the
market. Thus, there is no such situation where there is excess supply in the market and
unemployment in the economy. It is based on the assumption that the economy functions in such
a way that generated income will be spent at a rate that will maintain the full employment in the

3ECONOMICS ASSIGNMENT
economy. Full employment equilibrium is the Pareto optimal situation and the economy always
has a tendency to move towards that.
The classical economists highlighted that the economies are inherently self-regulating
and achieve equilibrium without any government intervention. The equilibrium indicates full
employment, stabilized and no inflation in the economy (Keynes 2016). However, the neo-
classical theories argue that, the economies are not completely free market economies; rather
those are mixed market economies that have the benefits of free as well as regulated markets.
Government plays a major role in determining the flow of resources for production in this
economic theory. In this theory, the supply and demand depend on individual’s ability of profit
maximization and rationality, and equilibrium depends on resource allocation and income
distribution regulations. Thus, the market forces require regulations to achieve optimum
equilibrium.
Answer 3
Free trade refers to the trade policies that enable the countries or parties to import and
export goods without any tariff or nontariff barriers. Free trade results in comparative advantage
for the countries, trade creation, increase in exports, economies of scale, competition, economic
growth and proper and full utilization of resources. According to Adam Smith, free trade
provides the scope of creating comparative advantage in their areas of specialization (Irwin
2015). David Ricardo, J. M. Keynes, G. Mankiw and J. Stiglitz, all the famous economists

4ECONOMICS ASSIGNMENT
supported the idea of free trade as that has immense benefits to all the parties, apart from the
comparative advantage.
Trade barriers cause inefficiencies as well as limit the volume of trade. These are
government imposed regulations that are usually imposed to protect the domestic industries by
restraining the free exchange of products and services. There are some cons of trade barriers. If
tariffs are imposed on the imported goods to protect the domestic industries, then level of
imports falls as well as imports become costlier and the industries will not have any incentive to
reduce the cost or improve the quality. Thus, products of poor quality will be available at a
higher cost. This will reduce customer satisfaction. This also limits the number of substitute
goods in the domestic market. Non-tariff barriers include levies, embargos, quotas, and sanctions
etc., most commonly used by the developed countries, with the major objective of increasing the
competitiveness of local industry (Maggi, Mrázová and Neary 2017). However, the fall in the
international products results in fall in the efficiency of the local producers and thus, leads to
inefficiencies.
In the context of developing countries, the free trade promotes more amount of trade and
thus, leads to increase in production. The competition in the international markets helps the local
manufacturers to improve the quality of products. With free trade they also can access cheaper
raw materials, which enable them to reduce the cost of products (Anderson and Yotov 2016). In
the developed countries, quotas, embargos and levies are mostly imposed on the imports to
protect their domestic industries. Thus, level of trade is reduced due to trade barriers. Thus, it can
be said that free trade is beneficial for participant countries and the tariff and non-tariff trade
barriers leads to inefficiencies in the developed as well as developing countries.

5ECONOMICS ASSIGNMENT
References
Ahiakpor, J.C., 2017. Journal of the History of Economic Thought Preprints-Keynes, Mill, and
Say’s Law: A Comment on Roy Grieve’s Mistaken Criticisms of Mill.
Anderson, J.E. and Yotov, Y.V., 2016. Terms of trade and global efficiency effects of free trade
agreements, 1990–2002. Journal of International Economics, 99, pp.279-298.
Costanza, R., Hart, M., Kubiszewski, I. and Talberth, J., 2014. A Short History of GDP: Moving
Towards Better Measures of Human Well-being. The Solutions Journal, 5(1), pp.91-97.
Decancq, K. and Schokkaert, E., 2016. Beyond GDP: Using equivalent incomes to measure well-
being in Europe. Social indicators research, 126(1), pp.21-55.
Irwin, D.A., 2015. Free trade under fire. Princeton University Press.
Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers &
Dist.
Maggi, G., Mrázová, M. and Neary, P., 2017. Choked by red tape? the political economy of
wasteful trade barriers. Red, (1/38).
smh.com.au, 2015. Australia ranks second-best in the world for quality of life, UN study says.
[online] The Sydney Morning Herald. Available at: http://www.smh.com.au/business/the-
economy/australia-ranks-secondbest-in-the-world-for-quality-of-life-un-study-says-20151217-
glqi0l.html [Accessed 12 Feb. 2018].
Sowell, T., 2015. Say's Law: An historical analysis. Princeton University Press.

6ECONOMICS ASSIGNMENT
World Bank, 2018. GDP (current US$) | Data. [online] Data.worldbank.org. Available at:
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD [Accessed 12 Feb. 2018].