The Pros And Cons Of GDP As An Indicator Of Prosperity

Is GDP still relevant as an indicator of prosperity?

What is GDP? Gross domestic product is an economic indicator that reflects the monetary value of all final goods and services produced by a territory in a given period of time. In simple words, it is used to measure the wealth generated by a country.

GDP is probably the most important economic indicator in the economic news. It is always quoted when reporting on a country’s economic dynamism or prosperity. Prosperity and GDP are often subliminally equated. This comparison provokes criticism. Sections of society are demanding that the way in which wealth has been measured up to now is put to the test.

In the future, prosperity should be decoupled from growth. Therefore, instead of the gross domestic product, there should be another measure of prosperity and a new form of economic reporting in order to measure ecological, social, and societal developments in addition to economic ones.

GDP is not a measure of human well-being 

Equating prosperity and GDP has long been criticized. As early as the first half of the last century, renowned economists were controversially discussing whether a single condensed indicator can correctly reflect people’s well-being. In fact, there are good reasons not to simply interpret the level of gross domestic product as an accurate indicator of people’s well-being. Three examples may illustrate this:

1. The GDP contains variables that only compensate for losses in prosperity. For example, after natural disasters such as devastating storms or floods, the reconstruction work is booked as GDP growth and thus as a gain in prosperity, although actually only damaged or lost stock values were restored.

2. GDP does not include a number of effects that change prosperity. A classic example is unpaid housework. Do-it-yourself work undoubtedly increases wealth, but it is not recorded in the GDP account (only the materials bought for it, but not the work performed).

3. The conditions under which GDP is created are not taken into account. For example, whether someone does their work in a relaxed manner and with a lot of joy or whether this happens under great physical or psychological pressure and without any joy plays a major role in the well-being of the person in question – even if the end result is the same income in both cases. For the calculation of GDP, however, both cases are completely equivalent.

Additional prosperity indicators already available

The examples show that GDP is obviously not an ideal measure of prosperity but only a good indicator of a country’s economic dynamism. Economists have a broad consensus that GDP is simply a metric used to measure market output and income. For this reason, there have long been efforts on the part of politicians and international organizations to record the quality of life quantitatively using other, often social, indicators. Obviously, GDP as the sole indicator is no longer trusted.

The OECD developed the ‘Better Life Index’ to determine social well-being based on eleven subject areas – including education, security, and work-life balance – and to compare it internationally. The OECD is trying to broaden its perspective and move away from purely economic GDP data.

There is no shortage of key figures that can be used to depict prosperity and social progress beyond the GDP figures. However, it should not go unmentioned that such soft indicators can be vulnerable to political interference.

GDP is often the right measure

GDP will continue to be a very important indicator because material opportunities make a significant contribution to people’s well-being – even if the current zeitgeist sometimes suggests the opposite. As a key figure in the national accounts, GDP must not be diluted. Rather, the indicators that are already available should be used in the right place. With the softer prosperity indicators, politicians can gain valuable insights into what is important to citizens in addition to economic issues.

However, when it comes to the question of how sustainable a country’s public debt is, a hard indicator such as GDP must also be looked at in the future. After all, whether a country is able to repay its debts depends largely on its economic strength, i.e., on the level of GDP. Moreover, feel-good indicators would be the wrong measure here because debts can only be repaid from the income generated by a state – the reference to clean air or happy people will not make creditors shy away from their claims.