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Do we need another measure of economic prosperity?

I have written on this blog about the limitations of GDP as a measure of the standard of living in a country and would recommend reading Diane Coyle’s book ‘GDP: A Brief but Affectionate History’. Edoardo Campanella wrote a piece for Project Syndicate about abandoning GDP and how people have concerns with the pace of growth and how it is defined. He mentions two specific reasons for this:

1. Growth in the developed world has brought little benefit to the vast majority of citizens – the recovery in 2010 say the top 1% earn 93% of income growth.
2. Growth doesn’t actually take into consideration a lot of those things that contribute to human wellbeing. There is nothing about environmental conditions, the benefits of communities, the stability of individual and group identities etc

However today GDP determines a country’s status and access to clubs such as the OECD, G8, G20 thereby affecting the balance of global power.

Limits of GDP

GDP is a measure of the market value of all final goods and services produced in a year however it leaves out things that make us richer as people. For instance:

GDP declines if energy-efficient products reduce electricity consumption but rises with polluting activities that deplete the stock of natural resources. Also if we invest in anti-smoking campaigns or fight global terrorism, GDP will increase, without creating any wealth.

GDP is fixated on more not better – a car with air conditioning and a state of the art stereo system and GPS may be the same as one with no gadgets, regardless of differences in users’ experience. How do we measure the success of medical advancements especially in heart surgery that lead to greater life expectancy and a much better quality of life. One of the aspects that GDP misses are those things that are free in society, most notably the services provided on the Internet whether it be Wikipedia, Facebook, Twitter etc. But some have argued that innovation actually reduces GDP even though it may increase the welfare of individuals. Today you can book accommodation, flights, buy products etc online and at a cheaper price than before as the middle person is now excluded from the process. Another example is the price of a smartphone is lower than the prices of its components that used to be sold separately.

Adjusting the numbers

In an effort to update their methodologies, countries add new activities to its calculations. Most recently drugs, prostitution, and other undercover activities have been included in the calculation. However as Edoardo Campanella points out these changes can distort the value of GDP across time. In 2010 Ghana announced a 60% increase in GDP after updating its data-reporting methodology but the the standard of living for Ghanaians hadn’t changed. Likewise the changes in the tax domicile of some multinationals in Ireland resulted in an increase in GDP by 16% but no one felt any richer.

Cross Country Comparisons using GDP – China v USA

There are problems in the cross-country GDP comparisons. 2014 saw the overall GDP of China surpass that of the USA. But a more accurate indicator would be GDP per person and China’s per person income amounts to only 27% of the USA. See figures below:

Source: IMF

Are we any happier with more growth?

Countries maximize their output through technology, free trade (with comparative advantage) with the belief that greater GDP improves the well-bing of its population. Herek Bok of Harvard observed that “people are essentially n happier today than they were 50 years ago, despite a doubling or quadrupling of average per capita income”.

Another area that GDP does not consider is the distribution of income – two countries may be equal in overall GDP figures but differ greatly when you consider individual welfare. The elite have been rewarded disproportionately while many have been made worse off – the income of the top 1% has doubled since the late 1970’s at approximately 22% of GDP.

The way forward

As Edoardo Campanella suggests, rather than getting rid of GDP it should be refined and include socioeconomic indicators including GNH*. GDP cannot measure much of what people would consider crucial for a ‘good’ life – community, relationships, security etc.

*GNH – Bhutan is famous for its Gross National Happiness indicator which revolves around four pillars:
1. Sustainable Development
2. Preservation and promotion of cultural values
3. Conservation of the natural environment
4. Good governance

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