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 the GDP exclude?
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 topics aren’t covered by GDP?
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. Failure to indicate whether or not the country’s growth pace is sustainable.
What factors does the GDP overlook or ignore?
GDP is a measure of the value of goods and services purchased in markets, hence it does not include:
- Household production refers to productive activities that take place in the house but do not include market transactions. The measured growth rate overstates the development of all economic activities as additional services, such as childcare, meals, and laundry, are given in the marketplace.
- Underground production is a component of the economy that is hidden from view of the government, either to evade taxes and regulations or because the goods and services being produced are unlawful. The growth rate will be accurate if the subterranean economy is a relatively stable share of all economic activity.
- Leisure Time: Leisure time is a non-monetary economic good that is not included in official GDP numbers. Increases in leisure time slow economic progress, yet we appreciate our leisure time and are better off because of it. If we have little or no time to enjoy it, increased output isn’t worth anything.
- Environmental Quality: Pollution has no direct effect on the rate of economic growth. If pollution has a negative impact on our standard of living, our GDP measure does not reflect this. The reason for this is that while the gadgets we create to reduce pollution are counted as part of GDP, the pollution itself is not. (1)
Limitations of Real GDP
Other impacts on the level of living that are not included in GDP but are significant for the standard of living include:
- Health and Life Expectancy: While clearly crucial determinants in shaping people’s living standards, they are not included in real GDP. Infant fatalities and deaths during childbirth have practically been eradicated, which has enhanced health and life expectancy. From 70 years at the conclusion of WWII to approximately 80 years today, life expectancy has improved dramatically. These advancements have been hampered by AIDS and drug misuse, both of which lower our standard of living.
- Political Freedom and Social Justice: Real GDP does not measure political freedom or social justice. A country’s GDP may be high, but its political freedom and social fairness are constrained, resulting in a poorer standard of life. (1)
Self-Check Activity
Economic growth is defined as a steady increase in the number of manufacturing options available. Consider Table 3.4 and respond to the following question. To reveal the answer, click on the blank space. (1)
What isn’t covered in the GDP quizlet?
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.
Are they excluded from nominal GDP?
Government salaries, such as those of police officers, teachers, and judges, are included in nominal GDP as part of government purchases. Nominal GDP does not include salaries in the private sector.
What information does GDP provide about the 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 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. ‘ ‘
GDP = Consumption + Private Investment + Government spending + Exports Imports 4
This formula determines the monetary value of all goods and services acquired by individuals, businesses, governments, and foreigners within national borders. GDP, as a raw data analysis, provides an excellent comprehensive picture of market economic activity in the United States. GDP, on the other hand, does not provide a complete picture of economic and societal growth since it does not distinguish between types of expenditure and does not identify non-market forms of output or values without market pricing.
GDP, for example, only includes broad categories of consumer and government spending. It can’t tell the difference between “good” and “poor” expenditure. There is no distinction in GDP accounting if government spending increases as a result of a natural disaster, such as Superstorm Sandy, or as a result of a significant infrastructure expansion program. However, the infrastructure initiative is certainly beneficial to our economy and society as a whole. Similarly, if personal spending rises, GDP considers this a positive indication, even if the personal consumption is financed by credit cards or other debt-inducing methods.
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.