Question

Do you feel GDP is the best measure of economic well-being? Why or Why not? Please use at least two resources to support your opinion. Please use APA citation.

Answer 1

It shall be noted that GDP measures both the economy’s total income and the economy’s total expenditure on goods and services. However, it can not be termed as the best measure of economic well-being.

This is because of the following reasons:

1) A large GDP does in fact help us to lead good lives.

2) GDP does not measure the health of our children, the quality of their education, and the quality of life in general.

3) Because GDP uses market prices to value goods and services, it excludes the value of almost all activity that takes place outside markets, that actually has great significance on economic well-being, for example - meals prepared by a family member for the entire family, child care provided by parents at home, etc. GDP excludes most home products and other “non-market” activities such as leisure.

4) GDP as a measure excludes the quality of the environment. The deterioration in the quality of air and water, that GDP does not reflect on, would more than offset the gains from greater production. GDP does not capture features of the environment such as climate change and the availability of natural resources. Economical damages such as air pollution and the destruction of nature by the economic growth are not considered in the GDP calculation

5) GDP measure does not also reflect inequality in the distribution of income & wealth in society. It may contribute to the widening gap between the rich & the poor, because of which there are many evils that crop up in the society as in the form of corrupt officials, thieves, uncivilized people, criminals, dishonest lot and beggers.

6) GDP includes production that makes up for the depreciation of physical assets. Such production is done to maintain the current capital stock rather than increasing the services consumed by households.

7) GDP includes investment—by businesses, by government, and by households (through housing and consumer durables). While this investment may provide future services to households, it does not represent services enjoyed immediately by households.

8) GDP counts "bads" as well as "goods." When an earthquake hits and requires rebuilding, GDP increases. When someone gets sick and money is spent on their care, it's counted as part of GDP. But nobody would argue that we're better off because of a destructive earthquake or people getting sick.

APA citation:

Jones, Charles I. and Peter J. Klenow. 2016. “Beyond GDP? Welfare across Countries and Time” American Economic Review 106(9): 2426-57.

Krueger, Alan. 2008. “Comment on ‘Economic Growth and Well-Being: Reassessing the Easterlin Paradox’ by Stevenson and Wolfers.” Brookings Papers on Economic Activity, Spring