What’s wrong with GDP as a measurement of wealth?

@IE University

We’re finally emerging from the aftermath of the recession that began in 2007. But with financial crisis still fresh in the minds of many, younger generations are questioning the economic approaches of the past. Most significantly, they’re questioning GDP.

What is GDP?

GDP is the sum total of all the goods and services produced by a nation. It includes consumption, investment, government spending, exports, and imports. This focus on goods forms the bedrock of our economic model. GDP is the word bandied around by the world’s richest and most powerful. It’s the ultimate marker of success, a means of judging and ranking countries, and it must be increased, no matter what.

How does GDP miss the point?

Personal well-being

Measuring GDP alone means forgetting about human welfare. Focusing entirely on the material overlooks other measures more relevant to personal well-being like leisure time, security, and even clean air.

For example, following the recession, governments around the world implemented austerity measures because these would boost GDP. There was little thought for the effect that this would have on well-being.

Inevitably, this caused problems. In the US, recent political events have shed light on the sense of insecurity experienced by many citizens. Such issues were never exposed by GDP growth charts.

Inequality

Another argument for what is wrong with GDP is that it hides poverty and ignores inequality. GDP might rocket while, at the same time, disposable income falls. A country’s wealth might be on the rise without ordinary people having any experience of this newfound prosperity. 

Similarly, GDP tells us nothing about the distribution of wealth. With everyone looking at GDP, for example, we forget that the top global 1% now owns more than everyone else combined.

Sustainability

As far as GDP is concerned, more and bigger is always better. More houses, more cars, more flights, and so on, are all great. Environmental costs aren’t measured.

Foreign mining companies arriving to extract resources for export? They’ll provide a boost to GDP. Even an oil spill, which leads to increased spending on clean-ups, could be considered a win for GDP.

Incomplete picture

GDP measurements ignore any work done at home, including caring for relatives, because it has no material productivity value. The same goes for pro-bono and volunteer work.

Similarly, online work often evades statistical capture. A great example is Wikipedia, which provides human knowledge for free but is worth nothing in GDP terms.

Poor priorities

GDP can’t make judgments on quality. In economies with large service industries, GDP doesn’t expose improvements or failures of service because such changes don’t have material value.

If an airline’s safety record improves, great, but it means nothing to GDP.

Similarly, GDP makes no distinction between what’s good for humans and what’s not. It’s all about monetary value. By this logic, the production of weapons could be considered more valuable than the creation of mosquito nets for countries with malaria.

What’s the alternative?

Many call for a new way of measuring wealth; one that takes into account human welfare. A Happiness Index, for example. Such is the case in Bhutan, whose Gross National Happiness gauge takes account of living standards, mental health, and work-life balance, among other things.

Meanwhile, India and the UAE have also created “ministries of happiness” to promote economic growth that doesn’t come at the cost of quality of life.

Measuring GDP, experts can look at the data and claim things are getting better. But for many people out there living their lives, this might not be the case.

On the other hand, happiness is measured by the people directly experiencing it. It’s not abstract and experts can’t claim to know best.

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What’s the future for GDP?

It’s clear that GDP’s time is up. It cannot account for the increasingly complex political, social, and economic reality of the 21st century.

Instead of focusing on GDP alone, we need to look to other measures; those of equality, well-being, and the environment, to start with. Only then can we have a more complete picture of the wealth—and not just material wealth—of today’s nations.