Seven reasons why GDP is not useful for measuring well-being

The Gross Domestic Product (GDP) has become the most widely used indicator to measure the wealth of countries, their economic growth and their well-being. However, is it the most appropriate indicator for this? Since its inception, GDP has been designed as a tool to quantify the production of different economies, and it is relatively effective in doing so. But, Is it also a valid index to measure well-being or can it lead to mass errors?

Until the mid-1930s, there was no indicator that could measure the economic situation of a country. Faced with this void, the American economist Simon Kuznets, inventor of national accounting, created in 1934 a series of indicators, including GDP, which allowed us to know how much a country produced, how much it consumed or how much it earned.

As we know, GDP represents the value of all the services and goods produced by an economy over a period of time, usually one year. You might think that the higher the GDP, the greater the wealth of the country. However, if we stop to compare, for example, the GDP of Switzerland with that of Portugal, we see that that of our neighboring country is higher. Does this mean that Portugal is richer than Switzerland and that the well-being of its population is much higher? I think we already see where the shots go.

No, GDP is not a good indicator to measure well-being

The GDP is very useful to measure the production of an economy, but by itself and in isolation it is not at all adequate to measure the well-being of the population or its development. Let’s go over some of what we think are their main criticisms as an indicator of the well-being of a country:

  • As we saw in the example above, if we compare two countries and one has a higher GDP than the other, it might seem that it has a higher welfare. However, this is not the case at all because we are not considering the population of each country. As a solution, we use the PIB per cápita and we can affirm that, in general, countries with a high level of GDP per capita have a higher level of economic development. However, the problem here is that statistics can lead to erroneous conclusions, since this indicator also does not tell us how income is distributed among the citizens of a country.
  • There are very important activities in our society that, since they are not remunerated, are not taken into account by GDP. The most typical example is the work that people do at home. Domestic work is not included in the calculation of GDP because it is not valued in the market. However, if someone pays for it by hiring a home assistant, it is reflected. With volunteer work or with barter activities it is exactly the same: GDP ignores them.
  • The submerged economy it totally escapes from GDP accounting. Many activities are not declared to the public sector in order to avoid paying taxes and, therefore, their existence is not recorded. If this economy in B came to light and was considered by GDP, it would increase by several percentage points.
submerged economy
  • El PIB does not measure the level of development of a country, as well as the quality or level of its educational system or its health. Come on, the quality of life in general is not measurable by GDP, although it is true that countries with a higher GDP per inhabitant can afford better health or education services, as well as better infrastructure and services in general.

  • It does not measure the state of the environment or the damage caused to it or to natural resources by the economic activity carried out. In other words, GDP does not report externalities, that is, it does not reflect the totality of the benefits and social costs derived from economic activity.

  • El PIB neither does it measure the quality of the goods and services produced. The GDP figures are just numbers that do not take into account exactly what is being produced or what is the quality of what is being produced. This prevents, for example, comparing production between different periods. Does a computer add the same to GDP now as in the 1980s? The answer is no. Does a country of services add up to the same as an oil exporter? The answer is also no.

  • It ignores the value of elements that contribute to maintaining the level of well-being of the population, such as leisure or freedom. In the freest countries or in which their inhabitants have more leisure time and better options in which to invest it, well-being is much higher.

Is there an alternative to measure well-being?

Welfare state

As we can see, GDP presents important limitations that make it a questionable efficiency indicator to measure the well-being of society. Not surprisingly, even its creator, Kuznets himself, came at the time to criticize GDP, concerned that it was not the best possible measure of the well-being of citizens.

An alternative to measure well-being could be the Human development Index, a ranking that, in addition to GDP, incorporates two other factors: the education of citizens and their health. These three factors are weighted with the same weight and the index itself is quite representative of the progress of the countries and, therefore, of the well-being of their citizens.

Image | that way, eustace

In The Salmon Blog | Equality should not be an end: what eliminates poverty is economic growth

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