GDP is a Poor Measure of a Country’s Wellbeing. GDP stands for Gross Domestic Product. Many of us have certainly come across this term, be it in school, in a newspaper, on the television, or the internet. It is a metric often used by governments and the business community to evaluate and rank the health of national and global economies. The GDP of a country measures the monetary value of the goods and services produced and bought by the final user within a given period of time, within the country’s borders. When divided by the country’s population, we obtain the country’s GDP per capita.
Limitations of GDP as a Measure of Success
From its conception, GDP was only intended to measure the size of a country’s economy and not the nation’s wellbeing. Yet the two are often confused, and GDP is typically considered as the go-to metric to evaluate a nation’s development, including both its economic prosperity and societal well-being. Despite the continuous global use of GDP for several decades as a denominator of choice to rank countries, and as guide to develop policies for economic growth, its limitations for assessing the wellbeing of countries are well known.
A growing GDP implies a growing economy and often results in raising standards of living in the society. On the other hand, we also clearly know that this growth is typically accompanied by negative effects to the environment and society such as climate change, pollution, biodiversity loss, income inequality, etc. These negative consequences greatly affect a society’s well-being, yet, they are not considered in GDP calculations. GDP calculations emphasize economic growth, but ignore the negative consequences that result from achieving this growth. Basically, considering GDP as the sole indicator of a nation’s development, implies promoting economic growth at all cost, irrespective of the sacrifices made to achieve the growth, whether it be clean air, clean water, leisure time, or any other thing which is vital for human well-being.
Aside from the failure to consider the negative impacts of economic growth on the society when calculation GDP, David Pilling went ahead to enumerate 5 ways in which GDP gets it totally wrong as a measure of our success, and these include:
- Quantity over quality. Given that GDP was born of the manufacturing age, it is better suited at measuring quantity over quality. For example, GDP does not reflect improvement in the safety record of an airplane, but might actually increase as a result of a plane crash which will result in building a new plane. This factor is also a big limitation for modern economies in which the service industry makes up a significant proportion of the economy unlike during the manufacturing age.
- GDP fails to account for the benefits of technology/internet. For example, all the services provided free of charge through the internet or various apps, despite improving one’s convenience, these have no value in GDP terms.
- GDP deals in aggregates and says nothing about distribution in the society. For example, GDP is unable to differentiate between an economy where 90 percent of what’s produced goes to 1 percent of the population, leaving 99 percent barely surviving; and an economy where the growth is distributed in a more equitable manner.
- In GDP terms, bigger is always better. This unfortunately has a limitation and could imply that things are out of control, and could eventually lead to a crisis. For example, when the financial sector grew bigger and bigger, it went eventually went out of control and led to a financial crisis in 2009.
- GDP typically measures only cash transactions through official/organized markets, but fails to account for volunteer work, housework, or caregiving to an ageing/disable relative. This means that what is produced and consumed at home (or through barter) does not count, whereas this is a significant proportion of the economy in developing nations particularly. For example, if a mother bakes a loaf of bread to sell, that counts as GDP, but baking the same load of bread for her children does not count as GDP.
Quite often, GDP growth, does not mean an increased wellbeing for everyone, especially in already wealthy countries suggesting that GDP is a poor measure of a country’s wellbeing. For example, data from surveys across OECD countries reveal that happiness and life satisfaction are only weakly related to levels of GDP per capita.
Alternative or Complementary Metrics to GDP
Given the well-known and agreed upon limitations of GDP as a measure of success and well-being, experts agree that better alternative or complementary metrics are needed. Several national and international organizations have developed (and continue to), alternative metrics which consider both income and non-income variables such as environmental factors, life expectancy, measures of inequality, etc., to provide a better measure of development which includes economic prosperity, as well as societal and environmental well-being. Three of these alternative/complementary metrics include:
- The Human Development Index (HDI). This metric is based on three key dimensions of human development, namely: a long and healthy life; being knowledgeable; and having a decent standard of living. An index is assessed for each dimension using corresponding indicators. The indicator for the health dimension is life expectancy at birth. For knowledge, the indicators used are expected years of schooling for children of school entering age, and mean years of schooling for adults aged 25 years and more. Lastly, the standard of living dimension is assessed using Gross National Income (GNI) per capita as indicator. The human development index (HDI) is the geometric mean of normalized indices for each of the three dimensions.
- The Genuine Progress Indicator (GPI) is a metric that incorporates not only economic, but also environmental and social factors in assessing the well-being of a nation.
- The Happy Planet Index (HPI) is a metric used for ranking countries by how efficiently they deliver long, happy lives using our limited environmental resources. It is calculated based on three elements namely: wellbeing multiplied by life expectancy, divided by ecological footprint. Wellbeing is rated by residents of a country using a scale of 0-10 using the Gallup world poll. Life expectancy is the average number of years and average person is expected to live in each country. Lastly, ecological footprint is the average impact each resident of a country places on the environment, and is expressed using the unit, global hectares (gha) per person.
As said by the economist Joseph Stiglitz, “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.” As sustainability considerations transform our world, it is vital that we reinvent our metrics, to obtain an accurate and comprehensive understanding of well-being in our countries because GDP is a poor measure of a country’s wellbeing.
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