GDP is the most often used metric of well-being and is a valuable indicator of a country’s economic performance. It does, however, have some significant drawbacks, including: Non-market transactions are excluded. The failure to account for or depict the extent of income disparity in society.
Why is GDP such a bad metric?
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 exactly is the issue with GDP?
This is just beginning to change, with new definitions enacted in 2013 adding 3% to the size of the American economy overnight. Official statistics, however, continue to undercount much of the digital economy, since investment in “intangibles” now outnumbers investment in physical capital equipment and structures. Incorporating a comprehensive assessment of the digital economy’s growing importance would have a significant impact on how we think about economic growth.
In fact, there are four major issues with GDP: how to assess innovation, the proliferation of free internet services, the change away from mass manufacturing toward customization and variety, and the rise of specialization and extended production chains, particularly across national borders. There is no simple answer for any of these issues, but being aware of them can help us analyze today’s economic figures.
Innovation
The main tale of enormous rises in wealth is told by a chart depicting GDP per capita through time: relatively slow year-on-year growth gives way to an exponential increase in living standards in the long run “History’s hockey stick.” Market capitalism’s restless dynamism is manifested in the formation and expansion of enterprises that produce innovative products and services, create jobs, and reward both workers and shareholders. ‘The’ “Economic growth is fueled by the “free market innovation machine.”
Why is real GDP incorrect?
The G20 summit, which just ended, was focused on economic growth. The final message begins as follows:
“Our top aim is to increase global growth in order to provide improved living conditions and quality jobs for people all around the world.”
Only article 19 (out of 21) mentions climate change. While the parties agree to “support strong and effective action to address climate change,” this is defined as “economic growth and certainty for business and investment.”
Despite this, the global economy has been stagnant for decades. The policies advocated by the G20 will only serve to worsen this terrible trend.
Many people will doubt this claim, claiming that GDP hasn’t been expanding steadily since World War II, with just the rare slowdown. GDP has increased, although this rise has been “uneconomic” since roughly 1980. This is in the sense that human welfare per capita has not improved after accounting for the costs of inequality, environmental harm, and other welfare-related concerns.
The real economy, which includes everything that contributes to human happiness, is significantly larger than the market economy as measured by GDP. GDP was never intended to be used as a measure of total society well-being, and it should no longer be used for that purpose.
Our natural capital assets all of the gifts from nature that we don’t have to generate and the enormously valuable, but unmarketed, ecosystem services those assets deliver make up the real economy. Climate control, water delivery, storm protection, pollination, and recreation are among these services.
These natural resources are thought to contribute much more to human well-being than all of the world’s GDP put together. However, our casual disregard for their contributions has resulted in a huge depletion of these assets.
We have wasted at least US$20 trillion per year in non-marketed ecosystem services since 1997. This amount exceeds the GDP of the United States.
We’ve also undervalued the importance of social capital, which includes all of our formal and informal networks, institutions, and cultures, in promoting human well-being.
Since 1980, the G20 countries, in particular, have become far more unequal. Growing social difficulties, a reduced ability to generate and sustain social capital, and a lower overall quality of life have all come from rising inequality. The top 1% of income earners have reaped the majority of the growth in GDP over the last several decades. The remaining 99 percent have seen their actual incomes stagnate as their social and natural assets deteriorate.
Perhaps the most compelling tension is how we discuss and respond to climate change. One of our most valuable natural resources is our climate. Investing in and sustaining a stable climate, on the other hand, is considered as a barrier to economic growth. It should be considered as safeguarding an asset that underpins the entire human enterprise’s operation.
Climate disruption must be accounted for as a cost to GDP growth on par with the loss of industry, roads, and homes.
Similarly, any advances in GDP must be offset by the loss of social capital generated by increased inequality.
The Genuine Progress Metric is one indicator that accounts for changes in social and natural capital (GPI). Personal consumption is adjusted by income distribution, non-marketed services such as volunteer and home labour are added, and natural capital depletion costs such as air and water pollution are subtracted. Even though GDP per capita has more than doubled since 1978, the global GPI per capita has remained unchanged.
This indicates that since 1978, the world has been witnessing “uneconomic growth.”
The GPI has been adopted by two states in the United States, Maryland and Vermont, to help steer policy. Several others are thinking about it as well. It is past time for the rest of the world to recognize the truth of our un-economic growth policies and practices and begin the process of constructing a true economy that produces long-term, equitable prosperity for all. The United Nations’ Sustainable Development Goals process is a significant step in the right direction.
Perhaps at the next G20 conference, world leaders can talk about how to improve real economic performance genuine advancement rather than just increasing the amount of environmentally destructive, unequally distributed sold goods and services.
Dr. Robert Costanza is the Crawford School of Public Policy’s Chair in Public Policy.
On February 14, 2007, a man walks past buildings in Singapore’s central business area. Nicky Loh/Reuters
How can GDP be a deceptive indicator of 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.
What does GDP reveal about a country’s economy?
The Gross Domestic Product (GDP) is not a measure of wealth “wealth” in any way. It is a monetary indicator. It’s a relic of the past “The value of products and services produced in a certain period in the past is measured by the “flow” metric. It says nothing about whether you’ll be able to produce the same quantity next year. You’ll need a balance sheet for that, which is a measure of wealth. Both balance sheets and income statements are used by businesses. Nations, however, do not.
What are economic bads?
The polar opposite of an economic good is an economic evil. Anything that has a negative consumer value or a negative market price is considered ‘bad.’ Refuse is an example of a negative behavior.
A bad is a physical object that reduces a consumer’s satisfaction, or, to put it another way, a bad is an object whose consumption or presence reduces the consumer’s utility.
A two-party transaction for typical commodities results in the exchange of money for an object, such as when money is exchanged for a car. When a family gives over both money and garbage to a waste collector who is compensated to take the garbage, however, both money and the thing in question flow in the same direction. Garbage has a negative price in this situation because the waste collector receives both junk and money, and consequently pays a negative sum for the garbage.
Goodness and badness, on the other hand, are essentially subjective judgments. Two diners at a restaurant, for example, learn that the “secret ingredient” in the house specialty is peanuts. One of the diners like peanuts, while the other is allergic to them. In this example, peanuts are both a good and a bad economic choice at the same time and in the same region.
Furthermore, a good consumed by the same person might develop into a bad over time, and vice versa; for example, the nicotine in cigarettes may provide a smoker with a sense of reduced anxiety and tension. Continuing to smoke cigarettes for an extended period of time, on the other hand, may have major negative repercussions on a smoker’s health, turning cigarettes’ utility into a negative. On the other hand, some medical treatments or drug side effects may be unpleasant for a patient at the time of treatment, but they will significantly improve their health and well-being in the long run.
What makes real GDP more precise?
Real GDP, also known as “constant price GDP,” “inflation-corrected GDP,” or “constant dollar GDP,” is calculated by isolating and removing inflation from the equation by putting value at base-year prices, resulting in a more accurate depiction of a country’s economic output.
Why is nominal GDP so deceptive?
When viewed in isolation, the nominal GDP statistic can be misleading, since it might lead a user to believe that significant growth has happened when, in reality, a country’s inflation rate has increased.
What impact does GDP have on the economy?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What effect does GDP have on happiness?
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.