GDP, the difference between a good tool, and the right tool.

News stations report on it, economist and statisticians analyze it, policy makers inform the public of it. The Bureau of Economic Analysis calculates this standard measure quarterly. Gross Domestic Product (GDP) measures the level of all goods and services produced during a given time period. There are two ways of calculating GDP. One way is to add up the cost of all goods and services produced at the market price. This is not the units sold, but solely the units produced during that time period. This reflects the supply side of GDP, but does not take into account inventory from the previous year. The second way is to track all public and private spending and investment in a country. Calculating GDP in this fashion reflects the demand side of GDP. Supply and demand in theory should meet some equilibrium quantity of goods in the market. The spending that makes up GDP can be written in a simple equation: GDP = Consumption + Investment + Government + (Exports – Imports).  The term domestic refers to the fact that it is only goods produced within the United States. GDP acts as a measure of economic activity, many use it to reflect well-being. While the former may be warranted, the use of GDP as a term for well-being can be misleading. Baird et al. (2011) discusses the correlation between GDP per capita  and measures such as income and infant mortality rate in poorer countries. GDP could express the general well-being of individuals, but it is limited in its range of countries. GDP may be more relevant to well-being in less developed countries that still rely on manufacturing or agriculture. GDP lacks the scope of information necessary to represent something as subjective as well-being. That is not to say that GDP is not a good measurement, but rather the implementation of GDP as a blanket measure of well-being. Countries with large service industries produce services which are harder to quantify. GDP serves its purpose, but there must be another means of calculating well-being. There must be a tool for the job.

Stiglitz, Sen, and Fitoussi wrote Mis-Measuring Our Lives: Why GDP doesn’t add up,  commissioned by Nicolas Sarkozy, president of France up until 2012, providing a starting point for that discussion. When countries like Ireland have growing GDP, but stagnant median disposable income, GDP does not properly represent the living standards of citizens. Income that goes abroad, but is created by goods produced within the country are counted towards GDP, but do nothing to further to standards of living for the general public. The financial sector is a source of income that counts towards GDP, but the returns on investment leave the economy. Another issue in measuring, there are goods that make us happy, but often lack a market. Utility gained from a beautiful park, Yellowstone, or climbing locations, Leavenworth and Vantage, is underestimated in GDP. The abatement of carbon emissions will help our generation and future generations. The ability to quantify the negative externalities faced from pollution, or the social benefit from abatement, is intangible. The globe needs an index comprised of many different statistics to properly describe the general well-being of individuals. The measure needs to take into account income inequality, access to basic necessities, the sense of community. Some are easier to record than others. Ruut Veenhoven conducts surveys on happiness in the Netherlands and created the World Happiness Database. This includes correlation findings on happiness and global development indices such as corruption, unemployment, and strength of close relationships to friends and family. A new tool is needed to shed light on how happy we really are. This may be the initial blueprint to forming the right one.

About Jared Soares

Hello, my name is Jared Soares. I am pursuing a degree in economics with minors in mathematics and computer science. Outside of school I enjoy hiking, rock climbing, cooking and performing with the improv comedy troupe Ubiquitous They.

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