GDP measures prosperity, right? Well, maybe not as precisely as we think
GDP measures prosperity, right? Well, maybe not as precisely as we think
1000 ways to improve our lives / No. 56
Good moring from Berlin,
If we want to know how well the people in a country are doing economically, we usually look at a single key figure: G D P.
GDP stands for gross domestic product. It measures the market value of all the final goods and services produced in a specific time period by a country.
Measured by GDP per capita, the four wealthiest countries are Luxembourg, Singapore, Ireland and Norway. In contrast, African countries such as Burundi, the Central African Republic and the Democratic Republic of Congo bring up the rear.
So GDP measures economic activity. But the metric is blind to the reason for some economic activities. This can lead to misjudgments of prosperity.
What do I mean by that?
Imagine an earthquake destroys multiple buildings in a country. When the buildings are rebuilt, economic activity is high (and thus is GDP), but the country's prosperity does not increase as a result. Only the prosperity that prevailed before the earthquake is restored.
Or let's talk about the climate. Due to economic activity, we emit increasing amounts of CO2 and due to the harmful effects of climate change, we have to use parts of our economic output to eliminate the consequential damage or to pay for protective measures such as dykes. Here, too, GDP increases, but not necessarily prosperity.
So, with GDP, we sometimes only seem to measure prosperity.
And sometimes, it's the other way around. Then, there is prosperity, but it is not counted.
Whenever there is no money exchanged with an economic activity, it is not registered in the GDP measurement. Think about, for example, volunteer work with the fire brigade or in the municipal music band.
Or any achievement that is made in the family. You raise your child by yourself, no reflection in GDP. Yet, if you give your child into kindergarten, GDP increases (because nursery school teachers are paid).
Technological advances mean that we now have more free time than ever before. That is definitely prosperity. But large parts of it are not reflected in the GDP.
So, let's look for a new metric. One that can measure how well people are doing. Why don't we try to measure what – in the end – all the economic activity is about, why not measure happiness?
On July 18, 2008, the Gross National Happiness Index, GNH for short, was instituted as the goal of the government in the Constitution of Bhutan.
The GNH Index measures the happiness and well-being of Bhutan's population with the Gross National Happiness Commission compiling the index. But how is that done? By asking the public.
GNH surveys consist of questionnaires polling citizens about living conditions and religious behaviour, including questions about the number of times a person prayed in a day and other karma indicators.
The nature of these questions shows that happiness is ultimately a subjective matter. This makes it difficult to compare one person's happiness with others. In addition, it is challenging to compare happiness across cultures.
However, many happiness economists – yes, this is a profession – believe that they have solved this comparison problem. How so? By using large data samples across nations and time. What they see is that there is a consistent pattern in the determinants of happiness.
Here is the list of criteria that are decisive for the happiness of the people of a country:
Social security
Employment
Relationships and children
Religious diversity
Leisure
Economic security
Political stability
Economic freedom
Democracy
Economic development
but also
GDP and
Individual income
The Upshot: GDP is not as good an indicator of well-being as many people think. It would be better to measure happiness, but that is complex to measure. Incidentally, the United Nations has faced up to the complexity. The World Happiness Report has been published annually since 2012. And which country is the happiest in the world in 2023? For the sixth consecutive year, Finland was ranked on top followed by Denmark, Iceland, Israel and the Netherlands. In the top-10 rankings, Israel jumped five places, while Switzerland fell four places. Lithuania was the only new country in the top 20.
Onwards,
The Strolling Economist
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