Question

Do you agree with the author's assessment that GDP fails to measure well being? Why (or why not)? Are there things that contribute to your well-being and happiness but are excluded from the calculation of GDP? Share an example and describe why it might be excluded from the GDP calculation.

How should we measure changes in an economy's standard of living, or compare living standards across countries? Typically, economists use GDP per capita as a proxy for a country's standard of living, but as International Monetary Fund head Christine Lagarde, Nobel prize-winning economist Joseph Stiglitz and MIT professor Erik Brynjolfsson noted at the recently concluded World Economic Forum in Davos, Switzerland, "GDP is a poor way of assessing the health of our economies and we urgently need to find a new measure."Using GDP as a measure of welfare has well-known problems, which are among the first things macroeconomics principles courses cover. But the point of the discussions at Davos is that in the digital age, those problems are even deeper. Standard GDP statistics miss many of technology's benefits, so we need to rethink how we measure the typical person's well-being.

The textbooks generally point out five problems with using GDP as a measure of well-being:

• 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.
• GDP makes no adjustment for leisure time. Imagine two economies with identical standards of living, but in one economy the workday averages 12 hours, while in the other it's only eight. Which country would you rather live in?
• GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity. This is a big omission, particularly in developing countries where much of what's consumed is produced at home (or obtained through barter). This also means if people begin hiring others to clean their homes instead of doing it themselves, or if they go out to dinner instead of cooking at home, GDP will appear to grow even though the total amount produced hasn't changed.
• GDP doesn't adjust for the distribution of goods. Again, imagine two economies, but this time one has a ruler who gets 90 percent of what's produced, and everyone else subsists -- barely -- on what's leftover. In the second, the distribution is considerably more equitable. In both cases, GDP per capita will be the same, but it's clear which economy I'd rather live in.
• GDP isn't adjusted for pollution costs. If two economies have the same GDP per capita, but one has polluted air and water while the other doesn't, well-being will be different but GDP per capita won't capture it.

The Davos discussion, however, is pointed at a different flaw in measured GDP: its inability to fully capture the benefits of technology. Think of a free app on your phone that you rely upon for traffic updates, directions, the weather, instantaneous information and so on. Because it's free, there's no way to use prices -- our willingness to pay for the good -- as a measure of how much we value it.

As a result, GDP statistics won't capture the benefits we gain from free apps, just as it has difficulties accounting for changes in the quality of goods over time.

How can this be fixed? Catherine Rampell provides a nice summary of the alternative measures that have been proposed, including China's "green GDP," which attempts to adjust for environmental factors; the OECD's "GDP alternatives," which adjust for leisure; the "Index of Sustainable Economic Welfare," which accounts for both pollution costs and the distribution of income; and the "Genuine Progress Indicator," which "adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution."

Finally, there are more direct measures of well-being such as the Happy Planet Index, Gross National Happiness and National Well-Being Accounts.

However, none of these alternatives deal with the main problem discussed in Davos -- how to measure the full impact of technology on our lives. The problem is that GDP assigns a zero value to goods with a zero price, but those goods aren't valued at zero and as they become more prominent, we'll need to find a way of including the benefits they provide in our measures of the standard of living.

None of the measures proposed so far are perfect, and they won't replace the current GDP yardstick anytime soon.

But there's still something to be gained from this work. When you hear that your standard of living has gone up, ask yourself what has happened to leisure time -- are you working more or less for the same income? How much of technology's benefits might have been missed -- how often do you use Wikipedia? And how was the additional GDP distributed across the population -- did it mostly go to the 1 percent?

In the end, economists -- and the public -- don't care about GDP by itself; they care about the happiness they receive from the goods and services they consume. We've made some progress on measuring the well-being of individuals within an economy, but not enough. More research is needed.

Answer 1

Yes author is correct . GDP fails to measure well being.GDP is an indicator of a society’s standard of living, but it is only a rough indicator. Following are certain limitations of GDP

• GDP does not count for leisure time. The GDP of US is larger than that of Germany . But it does not mean that standard of living is higher in US than in Germany. The leisure time which German people spend with their families on vacation does not form part of GDP.
• GDP includes the amount spent on education, health, environment cleanliness. But it does not highlight how many people have become literate, it does not tell how much environment is purified or how many people have become more healthy.
• GDP has nothing to say about the level of inequality in society. GDP per capita is only an average. When GDP per capita rises by 5%, it could mean that GDP for everyone in the society has risen by 5% or that the GDP of some groups has risen by more while the GDP of others has risen by less—or even declined.
• GDP does not include transactions not traded in the market. The fruits and vegetables grown in your home garden will not form part of GDP.
• The income earned from illegal transactions like gambling or income from underground economy does not form part of GDP. So, GDP is under stated.
• Everytime rise in GDP is not a good sign . Suppose a particular locality people have to install theft alarms in their houses due to increase rate of crimes and thefts. In this case the GDP will rise but this point out that standard of living has declined as people ate living under fear.

To conclude we can say that the standard of living is all elements that affect people’s happiness, whether these elements are bought and sold in the market or not.GDP is a measure of well being but it is a rough measure.

Following methods can be used to measure the standard of living.

Green GDP

Green GDP takes into consideration the environmental impacts on the productivity of the country. It is derived from GDP itself after adjusting the cost of environmental degradation and pollution damage. In other words, Green GDP equals GDP less Natural Resource Depletion Less Pollution Damage.

Happy Planet Index

The Happy Planet Index assesses nations in various regions of the world for "sustainable well-being" by measuring the happy life years of citizens and the ecological footprint made by their resource consumption.

Gross National Happiness

It refers to collective happiness of the nation. It includes, Sustainable development, Preservation and promotion of cultural values, Environmental conservation and  Good governance.

National Accounts for Well Being

It requires governments to directly and regularly measure people’s subjective well-being: their experiences, feelings and perceptions of how their lives are going, as a new way of assessing societal progress to capture a more accurate figure of well being.

To conclude GDP is rough measure of well being as it has certain flaws. The new alternative methods mentioned above provide a better picture of well being but there are certain limitations related to them particularly in terms of quantifying values and time and expenditure involved.