Is GDP still a good measure of standard of living?
Government expenditure is a critical factor in the calculation of Gross Domestic Product (GDP) of any country. Hence, it is important to note how the upcoming budget for Pakistan will have an impact on the well-being of the overall society. Even if people do not know what GDP means or even stands for, they regard it as an important indicator. This status comes from a long and frequent use of GDP to measure and compare the economic state of any country, globally.
It has almost been 80 years since the concept of GDP was introduced. GDP essentially indicates the society’s standard of living by measuring all the consumption by individuals in a country, all the investment by businesses in the country and all the purchases by the government and foreigners made locally minus the purchases of things made abroad. It is one of the most popular indicators to measure an economy’s output and growth relative to other countries. It is important as it gives a bird’s eye-view of how an economy is doing. A higher GDP is generally a good sign indicating more jobs, better salaries and more investments – overall a lot of good things happening in a country.
However, by any means it is not a complete picture of a national economy. Though, why is it important, what metric in primarily used? The problem arises when over-reliance of one metric such as GDP distorts decision-making as it plays a critical role for the basis of formulating policy and setting priorities. Thus, a higher level of GDP should not be the sole goal of any governments macroeconomic policy.
Lately, a lot of researchers and economists have concluded GDP to be no longer a useful measure of economic progress. GDP tends to have skewed priorities as it does not account for many factors that are important as they impact people’s happiness even if they are not bought and sold in a marketplace such as leisure, natural capital, quality of health and education, inequality, technological advancements and overall positive or negative value placed on the type of output by society. Therefore, in order to generate a better and more meaningful economic-welfare metric, it needs to account for other important components.
Though, there is no consensus on a possible alternative, yet. Establishing a new replacement requires a new concept of prosperity and a technique to measure change in living standards. There are several potential alternatives being discussed around the world.
One famous approach is introduced by Economists at Massachusetts Institute of Technology. To make GDP more relevant to current times, they proposed to ask people how much they value free digital goods such as online research engines and social media platforms. Then the results are added to the traditional GDP. Hence, this method attempts to capture meaningful technological advancements that have made the lives of people incredibly easy. For example, it will account for students enrolled in a school and also the ones enrolled in free online courses.
Another approach adds leisure to GDP. This is being advocated and used by few countries by using nation-wide surveys that report levels of well-being or happiness. This is important factor to measure happiness as for example GDP per capita of US is much larger than the GDP per capita of Germany but on average US workers work hundreds of hours more than the average German worker, annually. The German GDP fails to account for the extra family time or time spent on vacations.
Another way to relate indicators to policy would be to track the way people use their time and attach well-being measures to those activities. Though, this is more applicable for a service-based economy where time to produce and consume are major inputs. If food variety and quality increases at the local market, it won’t be noticed in GDP. It accounts for quantity but not the quality, at least not very well. Moreover, in this approach technological advancements clearly impact how people allocate their time to certain activities. Digitization has transformed ways in which individuals interact such as online booking has eliminated the need for travel agent and that needs to be reflected in the new measure for well-being.
Lastly, another widely debated approach is to measure wealth rather than income. This has huge advantage to manage the trade-off between future prosperity and that of today. Here what matters is the access to human capital such as skills and well-being, social capital in terms of relationships, healthy interactions and networks and suitable infrastructure. This approach is more useful as current GDP includes cost of buying environment friendly equipment but it does not reflect whether air and water quality has actually improved or worsened. Similarly, it tells the spending on healthcare but not the changes in life expectancy and infant mortality rate, which clearly impact societal well-being.
Many developed countries like United Kingdom, France and New Zealand have introduced initiatives and policy frameworks that include well-being indicators. It is very encouraging to witness such diverse and vigorous research on the issue of effective and accurate economic measurement. However, the challenge lies not only in developing an appropriate concept but how to implement this shift considering both developed and developing countries.
No single measure can capture all the elements of such broad concept of standard of living. And since majority of official public statistics are based on similar technical standards. It is not very useful for one country to move to a new framework unless a lot of other countries move too and at the same time. Thus, any successor needs to be easily and widely implementable in terms of detailed standard definitions and methods to collect and analyse the data. In order to be accepted, the new measure should paint a compelling and persuasive story consistent with what is happening in our economies currently. There might be a talk to dethrone GDP, but there is a long way to go before another appropriate indicator enjoys similar status.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.