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Is a Higher GDP What We Want?

April 8, 2011 ·

An increasing GDP may demonstrate growth in gross transactions, but it may not indicate that the majority of us are better-off.

When we take the sustainability of our economic activities into account and compare gross domestic product (GDP) to new economic indicators, the result may come as a surprise. An increasing GDP may demonstrate growth in gross transactions, but it may not indicate that the majority of us are better-off.

Politicians should take an interest in the impact on people’s quality of life when they are drafting and debating new policies. But unfortunately, they are limited in their understanding of social well-being when they use indicators like GDP to identify their focus and success. Using GDP fails to address the worsening of the current environmental and social problems, such as air pollution, unemployment, the vanishing middle class, and decreasing life satisfaction.

By definition, GDP is the market value of all final goods and services that are produced within an economy during a given period of time. It is the most widely-used measurement of economic growth, and is what policymakers currently focus on. Economic and finance textbooks typically explain that boosting the level of GDP is a primary goal of any kind of economic policy. However, many prominent economists are beginning to question that notion by asking if a higher GDP is really what we want for our nation, and if it is actually doing any good for the general public. In specific, they have started wondering if the ingredients within the GDP calculation are sufficient to represent how well we are doing.

“[GDP]measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”-- Robert F. Kennedy

We cannot really say that our society does better due to an increase in consumption that makes GDP go up. Environmental and social costs are not reflected from higher consumption, and GDP is inadequate if we truly want to examine the performance of our economy and society.

A sustainable society which allows its citizens to share its prosperity needs the right tools to guide it by measuring how far it is from achieving its goal. GDP is not a proper indicator of human well-being, and it should not be used for policy making. A flaw is built into the GDP calculation: it includes the monetary profits but excludes the social and ecological costs. For instance, GDP increases when sales of cigarettes go up. The figure climbs not only from the profits that are generated from the sales, but also because of the increases in health care expenses such as more frequent sickness or cancer due to smoking. Would it make sense for a government to support and advertise the sale of cigarettes so this dangerous activity can boost that country’s GDP? This shows how a population participating in unhealthy activities, which make them sick, results in a higher GDP. In contrast, a happy and sound society that refuses to participate in such risky practice could not demonstrate their increase in health through an increase in the health care sector’s GDP.

There is an urgent need for a new measurement of economic and social well-being that works as a supplement to GDP. Fortunately, there are some alternative indicators being developed. According to Lew Daly, senior fellow at Demos, “the goal is to change how we measure economic performance and social progress, in order to refocus public policy on critical social needs and on the resources we must preserve -- and create -- to ensure a more sustainable prosperity.” For instance, the STAR Community Index, the Canadian Index of Well-Being, and the Maryland Genuine Progress Indicator can be combined with GDP to do this better than GDP alone. They expand on economic activity by incorporating unpaid work with it.

GDP fails to recognize the non-monetary costs and the values of volunteer work. It overlooks the issue of inequality and the difference between good and bad economic activities. Therefore, it should be made clear to our politicians that raising GDP is not progress. We should start using the right tools to measure the right things.