“Gross Domestic Product counts everything, in short, except that which makes life meaningful,” Robert F. Kennedy stated 50 years ago.
Kennedy was correct. Gross Domestic Product (GDP) is a basic metric for measuring happiness. The market worth of all products and services produced by the economy is represented by GDP, which includes consumption, investment, government purchases, private inventories, and the foreign trade balance. While GDP per capita and well-being seem to correlate, whether GDP growth inevitably translates into better well-being at higher levels of GDP per capita is an empirical matter.
Why is GDP regarded as a well-being indicator?
Higher GDP levels are virtually usually linked to increased life expectancy, higher literacy rates, better nutrition and health care, and significantly more and better communication options (e.g. telephones and television sets). These are critical variables that influence people’s well-being.
How well does GDP reflect economic prosperity?
GDP is a good indicator of an economy’s size, and the GDP growth rate is perhaps the best indicator of economic growth, while GDP per capita has a strong link to the trend in living standards over time.
Is GDP a good indicator of a country’s prosperity?
Living standards have risen all throughout the world as a result of economic expansion. Modern economies, on the other hand, have lost sight of the reality that the conventional metric of economic growth, gross domestic product (GDP), just measures the size of a country’s economy and does not reflect the welfare of that country. However, politicians and economists frequently use GDP, or GDP per capita in some situations, as an all-encompassing metric for measuring a country’s progress, combining economic success with societal well-being. As a result, measures that promote economic growth are perceived as positive for society.
We now understand that the reality is more complicated, and that focusing just on GDP and economic gain as a measure of development misses the negative consequences of economic expansion, such as climate change and income inequality. It’s past time to recognise GDP’s limitations and broaden our definition of development to include a society’s quality of life.
This is something that a number of countries are starting to do. In India, for example, where we both advise the government, an Ease of Living Index is being developed to gauge quality of life, economic ability, and sustainability.
Our policy interventions will become more aligned with the qualities of life that citizens actually value, and society will be better served, if our development measures go beyond an antagonistic concentration on increased productivity. But, before we try to improve the concept of GDP, it’s important to understand where it came from.
The origins of GDP
The contemporary idea of GDP, like many of the other omnipresent things that surround us, was born out of battle. While Simon Kuznets is frequently credited with inventing GDP (after attempting to quantify the US national income in 1932 in order to comprehend the full magnitude of the Great Depression), the present concept of GDP was defined by John Maynard Keynes during WWII.
Keynes, who was working in the UK Treasury at the time, released an essay in 1940, one year into the war with Germany, protesting about the insufficiency of economic statistics in calculating what the British economy might produce with the available resources. He stated that the lack of statistics made estimating Britain’s capacity for mobilization and combat problematic.
According to him, the sum of private consumption, investment, and government spending should be used to calculate national income. He rejected Kuznets’ version, in which the government’s income was represented but not its spending. Keynes observed that if the government’s wartime purchase was not factored into national income calculations, GDP would decline despite actual economic expansion. Even after the war, his approach of measuring GDP, which included government spending in a country’s income and was driven by wartime necessities, quickly gained favor around the world. It is still going on today.
How GDP falls short
However, a metric designed to judge a country’s manufacturing capability in times of conflict has clear limitations in times of peace. For starters, GDP is an aggregate measure of the value of goods and services generated in a certain country over a given time period. There is no consideration for the positive or negative consequences produced during the production and development process.
For example, GDP counts the number of cars we make but ignores the pollutants they emit; it adds the value of sugar-sweetened beverages we sell but ignores the health issues they cause; and it includes the cost of creating new cities but ignores the worth of the crucial forests they replace. “Itmeasures everything in short, except that which makes life worthwhile,” said Robert Kennedy in his famous election speech in 1968.
The destruction of the environment is a substantial externality that the GDP measure has failed to reflect. The manufacturing of more things increases an economy’s GDP, regardless of the environmental damage it causes. So, even though Delhi’s winters are becoming packed with smog and Bengaluru’s lakes are more prone to burns, a country like India is regarded to be on the growth path based on GDP. To get a truer reflection of development, modern economies need a better measure of welfare that takes these externalities into account. Expanding the scope of evaluation to include externalities would aid in establishing a policy focus on their mitigation.
GDP also fails to account for the distribution of income across society, which is becoming increasingly important in today’s world as inequality levels rise in both the developed and developing worlds. It is unable to distinguish between an unequal and an egalitarian society if their economic sizes are identical. Policymakers will need to account for these challenges when measuring progress as rising inequality leads to increased societal discontent and division.
Another feature of modern economies that makes GDP obsolete is its disproportionate emphasis on output. From Amazon grocery buying to Uber cab bookings, today’s cultures are increasingly driven by the burgeoning service economy. The concept of GDP is increasingly falling out of favor as the quality of experience overtakes unrelenting production. We live in a society where social media provides vast amounts of free knowledge and entertainment, the value of which cannot be quantified in simple terms. In order to provide a more true picture of the modern economy, our measure of economic growth and development must likewise adjust to these changes.
How we’re redefining development in India
In order to have a more holistic view of development and assure informed policymaking that isn’t solely focused on economic growth, we need additional metrics to supplement GDP. Bhutan’s attempt to assess Gross National Happiness, which takes into account elements including equitable socioeconomic development and excellent governance, and the UNDP’s Human Development Index (HDI), which includes health and knowledge in addition to economic prosperity, are two examples.
India is also started to focus on the ease of living of its population as a step in this approach. Following India’s recent push toward ease of doing business, ease of living is the next step in the country’s growth strategy. The Ease of Living Index was created by the Ministry of Housing and Urban Affairs to assess inhabitants’ quality of life in Indian cities, as well as their economic ability and sustainability. It’s also expected to become a measurement tool that can be used across districts. We feel that this more comprehensive metric will provide more accurate insights into the Indian economy’s current state of development.
The ultimate goal is to create a more just and equitable society that is prosperous and provides citizens with a meaningful quality of life. How we construct our policies will catch up with a shift in what we measure and perceive as a barometer of development. Economic development will just be another tool to drive an economy with well-being at its core in the path that society chooses. In such an economy, GDP percentage points, which are rarely linked to the lives of ordinary folks, will lose their prominence. Instead, the focus would shift to more desirable and genuine wellbeing determinants.
Is GDP a reliable indicator of societal well-being?
The sole purpose of macroeconomic policy, or government policy in general, should not be a high level of GDP. Even if GDP may not accurately reflect a country’s overall standard of living, it does accurately reflect output and indicates when a country is materially better or worse off in terms of jobs and earnings. In most countries, a considerable increase in GDP per capita is accompanied by other improvements in daily living in a variety of areas, such as education, health, and environmental protection.
A word as wide as “quality of life” can’t be captured in a single figure. Nonetheless, GDP per capita is a respectable, if imprecise, indicator of living standards.
How might GDP be tweaked to better reflect happiness?
“Right now, we’re robbing the future, selling it in the present, and referring to it as GDP.” Hawken, Paul
Consider what would happen if a company utilized Gross Domestic Product (GDP) accounting to keep track of its finances: it would tally up all of its income and expenses to arrive at a final figure. Nobody would consider that a good indicator of how well the company was performing. “The existing national accounting system sees the world as a business in liquidation,” Herman Daly, a former senior economist at the World Bank, remarked. He also mentioned that we are currently seeing “uneconomic growth,” which means that while GDP is increasing, societal welfare is not.
The good news is that various GDP alternatives are being actively created, debated, and implemented. The Genuine Progress Indicator is one of them (GPI).
GPI starts with personal consumption expenditures, which are a big part of GDP, and adjusts it with 25 other factors. Include the negative consequences of economic disparity on wellbeing; add positive aspects not included in GDP, such as the advantages of household work, volunteer work, and higher education; and deduct environmental and societal costs, such as crime, unemployment, and pollution. It offers a more true picture of how far we’ve progressed in the last three decades as a result of this.
Is GDP a reliable indicator of a country’s prosperity?
Is GDP a reliable indicator of a country’s prosperity? No, it’s not the case. How do the costs of natural resource depletion that occur when output is produced get factored into the GDP calculation?
Why does GDP fail to adequately reflect happiness?
GDP is a rough indicator of a society’s standard of living because it does not account for leisure, environmental quality, levels of health and education, activities undertaken outside the market, changes in income disparity, improvements in diversity, increases in technology, or the cost of living.
Quiz: Why is GDP not a good indicator of economic well-being?
The use or depletion of our natural resources, such as oil, rainforests, wetlands, fish populations, and so on, has little effect on GDP. There is no indication of how the economy’s GDP is distributed across the various social and economic categories and people.
What is economic prosperity?
gauging and comprehending people’s happiness: Material living conditions (or economic well-being), which influence people’s consumption. opportunities and control over resources. The term “quality of life” refers to a set of non-monetary characteristics that people possess.
How do economists determine the rate of economic growth?
Obviously, not all developed countries share all of these qualities in the same way. Some of you may even criticize the inclusion of certain elements in the above list, citing nations (or regions within them) where, for example, crime and unemployment appear to be high, or pointing out that not everyone has access to adequate public services, housing, and so on. Some of these issues are definitely debatable. For example, crime rates in rural areas of many developing countries, where the majority of people live, are frequently lower than in some of the developed countries’ metropolitan population centers. Nonetheless, the traits that distinguish countries that are economically developed from those that are not are probably quite well represented in the preceding list.
Economic growth
You’ll notice, as you did with the last question, that the stated attributes speak more about goals than the methods or mechanisms for accomplishing them. So, what motivates a country to achieve these objectives? The conventional wisdom, as supported by most governments, large international organizations, and the economists who advise them, is that economic development is a big part of the solution.
Economic growth, on the other hand, can take many different directions, and not all of them are sustainable. Given the finite nature of the world and its resources, many contend that any sort of economic expansion is ultimately unsustainable. These discussions will be postponed. For the time being, let us consider what economic growth is and how it is measured.
Economists typically quantify economic growth in terms of gross domestic product (GDP) or related metrics derived from the GDP calculation, such as gross national product (GNP) or gross national income (GNI). GDP is estimated using annual data on revenues, expenditures, and investment for each sector of the economy from a country’s national accounts. It is feasible to estimate a country’s total income earned in any given year (GDP) or the total income earned by its population using these facts (GNP or GNI).
GNP is calculated by adjusting GDP to include repatriated money earned overseas and excluding expatriated income generated by foreigners in the United States. In countries with large inflows and outflows of this nature, GNP may be a better measure of a country’s income than GDP.
The income approach, as the name implies, evaluates people’s earnings, while the output approach assesses the value of the goods and services used to create these earnings, and the expenditure approach assesses people’s spending on goods and services. Each of these ways should, in theory, provide the same effect, so if the economy’s output rises, incomes and expenditures should rise by the same amount.
Economic growth is commonly expressed as a percentage rise in real GDP over a given year. Real GDP is computed by adjusting nominal GDP for inflation, which would otherwise make growth rates appear considerably larger than they are, particularly during high inflation times.
Short-term versus long-term growth
There must be a differentiation made between short-term and long-term growth rates. Short-term growth rates move in lockstep with the business cycle, which is to be expected. This may be seen in Figures 1.2.1 and 1.2.2, which show GDP growth in the United States from 1930 to 2003.