Monday, January 10, 2011

New alternative to GDP?

In "Elusive Economic Indicator: Quality of Life Gauge" (WSJ, 1-10-11, p. A2),  Mark Whitehouse presents recent research on an alternative measure to GDP. Recall GDP is the value of all goods and services produced within a country's borders. Since GDP does not seem to correlate well with measures of happiness, alternative measures have long been sought. 

Stanford Professors Peter Klenow and Charles Jones created a "Well-Being Index" that adjusts GDP for  three other factors: life expectancy, leisure, and income inequality.  These three factors have the advantage of being easily measured.  Many other relevant factors like environmental depletion and desirability of spending (ex. investment spending is more desirable than hurricane relief spending, but show up the same in GDP) are not so easy to measure and are not included. 

Just incorporating these three factors is enough to alter the international ranking of well-being/GDP. The U.S. still holds onto number one spot (according to chart in WSJ) but many European nations almost close their gap with the U.S.. Many emerging economies fall down the list. 

To understand why an alternative to GDP should be considered watch:

1. EUXTV 9-8-2009: An increase in GDP (dollar value of national output)  does not imply increase in well-being. (3 min)

2. ForaTV 1-22-2008: Winner of Nobel Prize in Economics ,  Joseph Stiglitz: "information affects behavior"  (8 min)

Stiglitz notes that if GDP is the yard stick of political success, then politicians will seek to maximize GDP, even if it is a poor measure of a country's well being. Stiglitz highlights important factors not included in GDP: income of median citizen, environmental depletion, health, leisure, spending on bads (disasters and prisons), offshoring (GDP does not reveal how much of income from production gets shipped back to foreign owners).

1 comment:

  1. After reading this article, it is clear that measuring the gross domestic product of countries is not the same as measuring the overall satisfaction of the citizens within the country. The article mentions several other factors that can be accounted for, such as leisure, that have nothing to do with the money a country brings in, yet have a significant effect on the citizens in the country. The studies with the per capita GDP index and the well-being index support the saying that money does not by happiness, for even though a country could have a lower GDP than another country, its citizens could enjoy different aspects of life that a richer country does not. Although a new method of measuring the overall well-being of a country in needed, it is difficult to do so, for measuring the happiness of individuals is much harder than measuring monetary values. Not only is the GDP measurement not representative of the satisfaction of a country's citizens, but it also does not represent the individual wealth of many citizens. For example, the overall per capita GDP of the citizens can change, but only a few people could actually contribute to this. In the youtube video posted by EUXTV, a person mentioned that the rich get richer, while the majority of the working class generally stay the same. The increase in income of the extremely wealthy increases the per capital GDP, yet fails to benefit the majority of the middle class.