How should we track changes in a country’s standard of life or compare them across countries? Typically, economists use GDP per capita as a proxy for a country’s standard of living, but as Christine Lagarde, Nobel Laureate Joseph Stiglitz, and MIT professor Erik Brynjolfsson noted at the World Economic Forum in Davos, Switzerland, “GDP is a poor way of assessing the health of our economies, and we urgently need to find a new measure.”
The limitations with using GDP as a measure of welfare are well-known, and they are one of the first topics covered in macroeconomics basics courses. However, the point of the Davos discussions is that these issues are now considerably more severe in the digital age. We need to reconsider how we assess the average person’s well-being because standard GDP numbers ignore many of technology’s benefits.
Using GDP as a metric of well-being has five major flaws, according to textbooks:
- GDP includes both “goods” and “bads.” When an earthquake occurs and requires reconstruction, GDP rises. When a person becomes ill and money is spent on their care, it is included in GDP. Nobody would argue, however, that we are better off as a result of a devastating earthquake or people being ill.
- There is no adjustment for leisure time in GDP. Imagine two economies with comparable living standards, but one with a 12-hour workday and the other with an eight-hour workweek. Which country would you choose to call home?
- GDP only counts items that flow via official, regulated markets, leaving out domestic production and black market activities. This is a significant oversight, especially in poor countries, since much of what is consumed is produced domestically (or obtained through barter). This also means that if people hire others to clean their homes instead of doing it themselves, or if they eat out instead of cooking at home, GDP will appear to increase even though overall output remains unchanged.
- The distribution of goods is not taken into account while calculating GDP. Imagine two economies, except this time one has a dictator who receives 90% of the output, while the rest of the population survives on the scraps. The allocation in the second is far more equitable. The GDP per capita will be the same in both instances, but it’s clear which economy I’d like to live in.
- Pollution expenses are not factored into GDP. If two economies have the same GDP per capita but one has filthy air and water and the other does not, well-being will differ, but GDP per capita will not account for it.
What does GDP not take into account?
In reality, “GDP counts everything but that which makes life meaningful,” as Senator Robert F. Kennedy memorably stated. Health, education, equality of opportunity, the state of the environment, and many other measures of quality of life are not included in the number. It does not even assess critical features of the economy, such as its long-term viability, or whether it is on the verge of collapsing. What we measure, however, is important because it directs our actions. The military’s emphasis on “body counts,” or the weekly calculation of the number of enemy soldiers killed, gave Americans a hint of this causal link during the Vietnam War. The US military’s reliance on this morbid statistic led them to conduct operations with no other goal than to increase the body count. The focus on corpse numbers, like a drunk seeking for his keys under a lamppost (because that’s where the light is), blinded us to the greater picture: the massacre was enticing more Vietnamese citizens to join the Viet Cong than American forces were killing.
Now, a different corpse count, COVID-19, is proving to be an alarmingly accurate indicator of society performance. There isn’t much of a link between it and GDP. With a GDP of more than $20 trillion in 2019, the United States is the world’s richest country, implying that we have a highly efficient economic engine, a race vehicle that can outperform any other. However, the United States has had almost 600,000 deaths, but Vietnam, with a GDP of $262 billion (and only 4% of the United States’ GDP per capita), has had less than 500 to far. This less fortunate country has easily defeated us in the fight to save lives.
In fact, the American economy resembles a car whose owner saved money by removing the spare tire, which worked fine until he got a flat. And what I call “GDP thinking”the mistaken belief that increasing GDP will improve well-being on its owngot us into this mess. In the near term, an economy that uses its resources more efficiently has a greater GDP in that quarter or year. At a microeconomic level, attempting to maximize that macroeconomic measure translates to each business decreasing costs in order to obtain the maximum possible short-term profits. However, such a myopic emphasis inevitably jeopardizes the economy’s and society’s long-term performance.
The health-care industry in the United States, for example, took pleasure in efficiently using hospital beds: no bed was left empty. As a result, when SARS-CoV-2 arrived in the United States, there were only 2.8 hospital beds per 1,000 people, significantly fewer than in other sophisticated countries, and the system was unable to cope with the rapid influx of patients. In the short run, doing without paid sick leave in meat-packing facilities improved earnings, which raised GDP. Workers, on the other hand, couldn’t afford to stay at home when they were sick, so they went to work and spread the sickness. Similarly, because China could produce protective masks at a lower cost than the US, importing them enhanced economic efficiency and GDP. However, when the epidemic struck and China required considerably more masks than usual, hospital professionals in the United States were unable to meet the demand. To summarize, the constant pursuit of short-term GDP maximization harmed health care, increased financial and physical insecurity, and weakened economic sustainability and resilience, making Americans more exposed to shocks than inhabitants of other countries.
In the 2000s, the shallowness of GDP thinking had already been apparent. Following the success of the United States in raising GDP in previous decades, European economists encouraged their leaders to adopt American-style economic strategies. However, as symptoms of trouble in the US banking system grew in 2007, France’s President Nicolas Sarkozy learned that any leader who was solely focused on increasing GDP at the expense of other indices of quality of life risked losing the public’s trust. He asked me to chair an international commission on measuring economic performance and social progress in January 2008. How can countries improve their metrics, according to a panel of experts? Sarkozy reasoned that determining what made life valuable was a necessary first step toward improving it.
Our first report, provocatively titled Mismeasuring Our Lives: Why GDP Doesn’t Add Up, was published in 2009, just after the global financial crisis highlighted the need to reassess economic orthodoxy’s key premises. The Organization for Economic Co-operation and Development (OECD), a think tank that serves 38 advanced countries, decided to follow up with an expert panel after it received such excellent feedback. We confirmed and enlarged our original judgment after six years of dialogue and deliberation: GDP should be dethroned. Instead, each country should choose a “dashboard”a collection of criteria that will guide it toward the future that its citizens desire. The dashboard would include measures for health, sustainability, and any other values that the people of a nation aspired to, as well as inequality, insecurity, and other ills that they intended to reduce, in addition to GDP as a measure of market activity (and no more).
These publications have aided in the formation of a global movement toward improved social and economic indicators. The OECD has adopted the method in its Better Life Initiative, which recommends 11 indicators and gives individuals a way to assess them in relation to other countries to create an index that measures their performance on the issues that matter to them. The World Bank and the International Monetary Fund (IMF), both long-time proponents of GDP thinking, are now paying more attention to the environment, inequality, and the economy’s long-term viability.
This method has even been adopted into the policy-making frameworks of a few countries. In 2019, New Zealand, for example, incorporated “well-being” measures into the country’s budgeting process. “Success is about making New Zealand both a terrific location to make a livelihood and a fantastic place to create a life,” said Grant Robertson, the country’s finance minister. This focus on happiness may have contributed to the country’s victory over COVID-19, which appears to have been contained to around 3,000 cases and 26 deaths in a population of over five million people.
What does GDP growth leave out?
Additionally, GDP does not account for the value added by volunteer work or the value of caring for one’s own children. For example, if a family hires someone to look after their children, that counts as GDP. However, the value of a parent staying at home to care for their child is not included in GDP.
Furthermore, the immense worth of the country’s natural capital and ecosystems is unaccounted for in GDP.
9 Preserving the country’s natural resources, which are vital to our current and future prosperity, isn’t counted, but using them in an unsustainable way is. Natural resources are only included in GDP estimates when they are sold or otherwise commoditized. For example, if all of the fish in the sea were captured and sold in a single year, world GDP would soar, despite the fact that the fishing sector would collapse and the wider ecology would be irreversibly harmed. As illustrated in the graph below, our economic growth is outpacing our ability to sustain it in the long run.
Why does GDP fail to measure happiness?
The Gross Domestic Product (GDP) measures both the economy’s entire income and its total expenditure on goods and services. As a result, GDP per person reveals the typical person’s income and expenditure in the economy. Because most people would prefer to have more money and spend it more, GDP per person appears to be a natural measure of the average person’s economic well-being.
However, some people question the accuracy of GDP as a measure of happiness. Senator Robert F. Kennedy, who ran for president in 1968, delivered a powerful condemnation of such economic policies:
does not allow for our children’s health, the quality of their education, or the enjoyment of their play. It excludes the beauty of our poetry, the solidity of our marriages, the wit of our public discourse, and the honesty of our elected officials. It doesn’t take into account our bravery, wisdom, or patriotism. It can tell us everything about America except why we are glad to be Americans, and it can measure everything but that which makes life meaningful.
The truth is that a high GDP does really assist us in leading happy lives. Our children’s health is not measured by GDP, yet countries with higher GDP can afford better healthcare for their children. The quality of their education is not measured by GDP, but countries with higher GDP may afford better educational institutions. The beauty of our poetry is not measured by GDP, but countries with higher GDP can afford to teach more of their inhabitants to read and love poetry. GDP does not take into consideration our intelligence, honesty, courage, knowledge, or patriotism, yet all of these admirable qualities are simpler to cultivate when people are less anxious about being able to purchase basic requirements. In other words, while GDP does not directly measure what makes life valuable, it does measure our ability to access many of the necessary inputs.
However, GDP is not a perfect indicator of happiness. Some factors that contribute to a happy existence are not included in GDP. The first is leisure. Consider what would happen if everyone in the economy suddenly began working every day of the week instead of relaxing on weekends. GDP would rise as more products and services were created. Despite the increase in GDP, we should not assume that everyone would benefit. The loss of leisure time would be countered by the gain from producing and consuming more goods and services.
Because GDP values commodities and services based on market prices, it ignores the value of practically all activity that occurs outside of markets. GDP, in particular, excludes the value of products and services generated in one’s own country. The value of a delicious meal prepared by a chef and sold at her restaurant is included in GDP. When the chef cooks the same meal for her family, however, the value she adds to the raw ingredients is not included in GDP. Child care supplied in daycare centers is also included in GDP, although child care provided by parents at home is not. Volunteer labor also contributes to people’s well-being, but these contributions are not reflected in GDP.
Another factor that GDP ignores is environmental quality. Consider what would happen if the government repealed all environmental rules. Firms might therefore generate goods and services without regard for the pollution they produce, resulting in an increase in GDP. However, happiness would most likely plummet. The gains from increased productivity would be more than outweighed by degradation in air and water quality.
GDP also has no bearing on income distribution. A society with 100 persons earning $50,000 per year has a GDP of $5 million and, predictably, a GDP per person of $50,000. So does a society in which ten people earn $500,000 and the other 90 live in poverty. Few people would consider those two scenarios to be comparable. The GDP per person informs us what occurs to the average person, yet there is a wide range of personal experiences behind the average.
Finally, we might conclude that GDP is a good measure of economic well-being for the majority of purposes but not all. It’s critical to remember what GDP covers and what it excludes.
Which of the following items cannot be included in GDP?
Assume Kelly, a former economist who is now an opera singer, has been asked to perform in the United Kingdom. Simultaneously, an American computer business manufactures and sells all of its computers in Germany, while a German company manufactures and sells all of its automobiles within American borders. Economists need to know what is and is not counted.
The GDP only includes products and services produced in the country. This means that commodities generated by Americans outside of the United States will not be included in the GDP calculation. When a singer from the United States performs a concert outside of the United States, it is not counted. Foreign goods and services produced and sold within our domestic boundaries, on the other hand, are included in the GDP. When a well-known British musician tours the United States or a foreign car business manufactures and sells cars in the United States, the production is counted.
There are no used items included. These transactions are not reflected in the GDP when Jennifer buys a lawnmower from her father or Megan resells a book she received from her father. Only newly manufactured items – even those that grow in value – are eligible.
What factors does GDP consider?
The gross domestic product (GDP) is a metric for assessing an economy’s health and well-being. GDP is the monetary value of all finished goods and services produced within a country’s borders within a given period of time (total output). It considers all commodities and services generated, as well as imports and exports and government spending.
Another way to measure a country’s economic strength is to look at its gross national product (GNP) and gross national income (GNI).
GNP is the entire worth of a country’s goods and services, similar to GDP. Unlike GDP, which reflects all production within a country’s boundaries, whether foreign or domestic, GNP represents all production by a country’s citizens or native firms, whether domestic or foreign.
GNI, on the other hand, is the entire income of a country’s citizens or businesses. It, like GNP, considers nationality rather than geography.
GNI is currently being acknowledged as a more meaningful statistic than GDP as the globe gets more globalized and geography becomes more important. ‘ ‘
What does GDP quizlet not cover?
Sales of items manufactured outside of our domestic borders, sales of old goods, illegal sales of goods and services (also known as the black market), and government transfer payments are not included. The GDP only includes products and services produced in the country.
Which of the following is not a drawback of GDP as a well-being indicator?
Which of the following is not a drawback of GDP as a well-being indicator? Only final commodities and services are counted in GDP, not intermediary goods. GDP would be significantly higher if Americans worked 60-hour weeks like they did in 1890, but the average person’s well-being would not necessarily be higher.
Quiz: What does GDP tell us about the economy?
The creation of nonmarket commodities, the underground economy, production effects on the environment, and the value placed on leisure time are not included in GDP estimates. -the study of an entire nation’s or society’s economics.
Why is it that GDP recorded in national accounts does not accurately reflect total output?
- It ignores the underground economy: Because GDP is based on official data, it ignores the size of the underground sector, which might be large in some countries.
- In a globally open economy, it is geographically limited: Gross National Product (GNP), which quantifies the production of a nation’s population and businesses regardless of their location, is seen as a better measure of output than GDP in some situations. For example, GDP does not account for earnings made in a country by international enterprises and remitted to foreign investors. This has the potential to exaggerate a country’s actual economic production. In 2012, Ireland’s GDP was $210.3 billion and its GNP was $164.6 billion, with the difference of $45.7 billion (or 21.7 percent of GDP) owing mostly to profit repatriation by foreign corporations based in Ireland.
- It prioritizes economic output above economic well-being: GDP growth alone is insufficient to assess a country’s development or citizens’ well-being. For example, a country’s GDP growth may be high, but this may come at a large cost to society in terms of environmental effect and income imbalance.
What are two things that GDP does not account for?
What items are excluded from GDP calculations? Illegal transactions, such as the black market, stock and bond sales, items produced at home but not sold (cooking, pluming, etc. ), used goods sales, leisure value, social well-being, pollution, and other negative externalities