‘Reality Always Winds Up Having the Last Word’: Why GDP is not an adequate measure of economic well-being

First and foremost, GDP is an inadequate measure of well-being because it was never intended to be a measure of economic well-being.  A new report by Joesph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi recently analyzed GDP as a measurement of well being. Perhaps the most striking conclusion was that, “One of the reasons people may perceive themselves as being worse off even though average GDP is increasing is because they are indeed worse off.

There are four important critiques of GDP offered in the report:

Gross product  v. net product

One of the more obvious problems with GDP is that gross product is simply not as useful of a measurement as net product. A company doesn’t measure it’s success in terms of gross revenue or production, but rather in terms of net revenue. It matters how much it costs to produce something. In terms of GDP, there are three main costs that often fly under the radar: 1) depreciation – products don’t maintain the same value over time. In the accounting of GDP each product maintains its initial shelf-value, with no accounting made for the fact that the computer I bought last month is already worth less than it was when I bought it. 2) Resource use – There is no accounting made for the depletion of natural resources. 3) Debt – GDP also does not consider the private and public debt incurred in production. Unfortunately, it is statistically difficult to come up with a reliable measurement of Net Domestic Product. Private and public debt can easily be measured and put on a balance sheet, but finding the correct way to appraise a country’s natural resources and include those on the balance sheet remains tricky, as does appropriately accounting for depreciation. Nonetheless, there is work being done on a balance sheet approach to a country’s economic health that attempts to account for these factors.

Mean v. median

We frequently use GDP per capita to measure economic growth. In reality a better measurement would be the median income. Relying on a mean rather than a median obscures the distribution of wealth. Although per capita GDP in the United States has grown over the past 30 years, most of that has accrued to the top 10 percent. Over at Economist’s View, Mark Thoma has some great charts comparing per capita GDP growth to median income. The conclusion: If median household income at kept pace with per capita GDP growth, the average U.S. family would make 91,000 instead of 61,000 (adjusted for taxes and government benefits).

Household production v. market production

GDP only counts market production. As we have shifted services like childcare and housework into the market sector, we have seen nominal increases in GDP. Childcare that is done in the home by parents/guardians/relatives has no impact on GDP, whereas paid childcare (which has become more common) increases GDP.  To give a simple example that illustrates the problem at the extreme, if two women were to trade children and pay each other 30,000 a year to nanny, GDP would rise by 60,000, even though the same amount of childcare is being produced. In reality, as women have moved into the workforce our society has shifted cleaning, cooking, and childcare into the market sector, which has resulted in GDP growth. However, in many cases, the same amount of work is being done and the GDP growth is at least partly (if not entirely) an illusion.

Efficiency realized in the form of leisure

GDP does not currently account for leisure, even though it seems intuitively obvious that producing the same amount of product in less time (thereby allowing more time for leisure) is an improvement. Economists often think of leisure as a product to be consumed like any other because the opportunity cost of leisure is less time earning money. It is an economically rational choice for a society to choose to use its increased efficiency to consume more leisure time rather than consuming ever more goods and services. The choice of leisure over goods and services also has the benefit of placing less strain on the environment and could decrease unemployment.

Conclusion

The report concludes that “GDP mainly measures market production, though it has too often been treated as if it were a measure of economic well-being. Conflating the two can lead to misleading indications about about how well-off people are and entail the wrong policy decisions.” GDP data is still valuable, but must be accompanied by a variety of other economic indicators in order to round out our perception of a country’s economic well-being. As former French President Nicolas Sarkozy writes in the foreword: “We have wound up mistaking our representations of wealth for wealth itself, and our representations of reality for the reality itself. But reality always winds up having the last word.”

 

Advertisements

2 thoughts on “‘Reality Always Winds Up Having the Last Word’: Why GDP is not an adequate measure of economic well-being

  1. Pingback: Market Norms are crowding out Social Norms, and society is poorer as a result | Faith and Public Policy

  2. Pingback: A non-technical introduction to problems in measuring poverty | End Poverty

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s