Question

Suppose Governor Mary Smith is campaigning for reelection as governor of her state. She claims that during her first term, the state's citizens are 50% better off since GDP has increased from $10 billion to $15 billion. Why might her claim be misguided?

When using economic data and statistics to give credibility to a statement, especially for a policy proposal, it's important to be precise about what statistics are being used. In this question, what type of GDP statistic is Governor Smith referring to real, nominal, per capita, growth rate, etc.? Not only that but if she's claiming that citizens are "50% better off", is GDP even the best measure of well-being?

please answer all asked thank you!

Answer 1

Her claim might be misguided because the increase in GDP could be an increase in the nominal GDP and not the real GDP. Nominal GDP increase could be due to an increase in prices or the production in the economy. It is therefore possible that this increase in GDP is only because the prices have increased and not the output. Only when the real GDP increases, can we say that the output increases and citizens are better off.

The Governor is most probably referring to the nominal GDP. This measure talks about production in the economy by considering current prices of goods and services.

GDP was not designed to measure the increase in the well being of the citizens in the economy. GDP is not the best measure of well being because:

1. GDP does not take into account many factors which are not marketed but are significant for human welfare. For instance, GDP shows an increase because the production of mobiles have increased but it does not account for the resulting increase in emissions which reduces the well being of the people.

2. GDP also fails to account for the inequalities in the economy. This means that if the GDP increases, this could be a result of an increase in the production and income of the richer sections of the society. There could still be the poor who are below poverty levels and massive inequalities in wealth and income might persist. Therefore an increase in GDP does not reflect an increase in the overall well being of people in the country.