Gross domestic product, or GDP, is defined as the monetary market value of all goods and services produced within a defined geographical area in one year (Bergh, 2009). The main architect of this measurement was Simon Kuznets, but he developed it in the 1930s for the United States national accounting system to answer questions such as how fast the economy was growing. He advised people against using the measurement for other purposes, namely equating GDP growth with economic or social well-being (Costanza, Hart, Posner, & Talberth, 2009). However, that is exactly what has happened, as it is used to measure something it was never meant to. Both GDP and GDP per capita have been met with heavy critique from a range of disciplines, as not being able to capture human welfare and progress. Still, they have maintained its positions as the dominant economic indicators in policy making for decades (Bergh, 2009).
The main question is whether we can use GDP as a metric for well-being or not. Before we do that, we must look into what well-being means exactly. The Oxford dictionary defines well-being as a state of being comfortable, happy or healthy (“oxforddictionaries.com,” 2016). One of the most common arguments in favor of using the GDP as a measure for well-being is that it positively correlates with a number of indicators that are thought to capture those elements of well-being, such as life expectancy at birth, adult literacy rate and indices of political and civil liberties. However, even though some things have positive correlations, we have to be aware that it doesn’t necessarily mean that there is a causality (Bergh, 2009). In a famous speech in 1968, Robert F. Kennedy criticised the economic indicator, saying that using GDP as a measure of a society’s progress represented a community that valued the accumulation of material things. The measurement did not account for the health of the country’s children, the quality of their education or the joy of their play, which are all things that make life worthwhile (Landefeld & Villones, 2009).
There is growing realisation that GDP is only able to measure economic quantity, not economic quality or welfare, let alone environmental or social well-being. This emphasis on quantity is encouraging increased extraction of natural resources, resulting in policies that ultimately undermine the future quality of life for generations to come (Costanza et al., 2009). Growth in GDP and the associated rise in material consumption does not compensate for basic needs not being met, such as access to clean air and nature. Also, if air, water and natural areas are being polluted, the damage does not enter into GDP calculations as a reduction. But when the pollution is cleaned up, it does in fact add to the GDP since that counts are services being bought. In addition to that, the depletion of natural stocks are not being accounted for, as well as the fact that natural resources are finite, resulting in the fact that GDP actually suggests we are richer than we really are (Bergh, 2009).
GDP per capita is an indicator that is meant to show the average income per citizen, but it does not tell you anything about changes in income distribution, even though uneven distribution of wealth implies that people face unequal opportunities for personal development and well-being. Many studies on well-being have showed that absolute individual income is not the best measurement of human welfare, but relative income has an influence on welfare as well as happiness of individuals (Bergh, 2009). A growing body of research also seems to confirm that an increase in material well-being will have a negative effect if it goes beyond a certain threshold, causing lower community cohesion, which can ultimately lead to decreasing happiness. Global trends actually suggest that as material wealth increases, societies tend to see more of social problems such as alcoholism, depression, crime, divorce, suicide and poor health (Costanza et al., 2009). Increases in average incomes and economic growth seems to have ceased to contribute much to well-being. Health issues and social problems only appear to have a weak relation to national average income among rich countries. When looking into this issue, Wilkinson and Pickett chose to analyze the Index of child well-being in rich countries compiled by the United Nations Children’s Fund, which combines forty different indicators of children’s well-being. Their research showed that their well-being was strongly related to income inequality, that is, the distribution of wealth. However, it did not seem to relate at all to average income (Wilkinson & Pickett, 2011). That indicates that GDP or GDP per capita is not a suitable measurement of the well-being of children, at least not in rich countries.
Even though GDP has become somewhat a measurement of success for countries in the world, one has to wonder, what is the end goal? Is the ultimate target for societies to have constant economic growth – and thereby a growth in GDP? As we have discussed above, GDP is not capturing some of the most vital things needed for humans to thrive, so it does appear that its importance in policy making is misguided at best. There have been some attempts to come up with a measurement to replace GDP as an influential indicator for economics, public policy and politics (Bergh, 2009). However, there seems to be no ideal alternative to GDP available today, even though most economists can agree that it has serious shortcomings and does not serve well as a measurement of well-being. An ideal indicator of social welfare could possibly mean taking an approach that draws from findings of research on happiness and subjective well-being (Bergh, 2009). A good starting point would be to recognise and agree upon the statement that GDP is not the ideal measurement for well-being and take it from there.
Bergh, J. C. J. M. Van Den. (2009). The GDP paradox. Journal of Economic Psychology, 30, 117–135. http://doi.org/10.1016/j.joep.2008.12.001
Costanza, R., Hart, M., Posner, S., & Talberth, J. (2009). Beyond GDP : The Need for New Measures of Progress.
Landefeld, J. S., & Villones, S. M. (2009). GDP and Beyond : Measuring Economic Progress and Sustainability, 1–28.
oxforddictionaries.com. (2016). Retrieved October 14, 2016, from http://www.oxforddictionaries.com/definition/english/well-being
Wilkinson, R., & Pickett, K. (2011). The Spirit Level: Why Greater Equality Makes Societies Stronger. Bloomsbury Press.