GDP and Economic Well-Being
Does GDP capture everything we care about in an economy?. The link between economic growth and human well-being seems obvious. Indeed, as measured by gross domestic product, economic growth. economic well-being might be stronger than the relationship between social capital and GDP per person. 1 Lars Osberg is with the Department of Economics, .
One would expect people to respond by buying more and louder burglar alarms, better locks, fiercer German shepherds, and more guard services than they had before. To the extent that they pay for these by dipping into savings rather than replacing other consumption, GDP increases.
Relationship of GDP with Economic Well-Being
An epidemic might have much the same effect on GDP by driving up health-care spending. But that does not mean that crime and disease are good things; it means only that crime and disease may force an increase in the production of goods and services counted in the GDP.
Similarly, the GDP accounts ignore the impact of pollution on the environment. Indeed, some of the environmental degradation might itself boost GDP. Dirtier air may force us to wash clothes more often, to paint buildings more often, and to see the doctor more often, all of which will tend to increase GDP! But more GDP does mean more of the goods and services we measure. It means more jobs. It means more income. And most people seem to place a high value on these things.
For all its faults, GDP does measure the production of most goods and services.
Relationship of GDP with Economic Well-Being
And goods and services get produced, for the most part, because we want them. We might thus be safe in giving two cheers for GDP—and holding back the third in recognition of the conceptual difficulties that are inherent in using a single number to summarize the output of an entire economy. In making such comparisons, it is important to keep in mind the general limitations to these measures of economic performance that we noted earlier.
Further, countries use different methodologies for collecting and compiling data. We can conclude that Country A produced times more goods and services than did Country B.
The data also attempt to adjust for nonmarket production such as that of rural families that grow their own food, make their own clothing, and produce other household goods and services themselves. Certainly we must be cautious. But the fact that a task is difficult does not mean it is impossible. When the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences in living standards.
Problems in the measurement of real GDP, in addition to problems encountered in converting from nominal to real GDP, stem from revisions in the data and the difficulty of measuring output in some sectors, particularly the service sector.
What impact would each of the following have on real GDP? Would economic well-being increase or decrease as a result? Spending on homeland security increases in response to a terrorist attack. Per Capita Real GDP and Olympic Medal Counts In the popular lore, the Olympics provide an opportunity for the finest athletes in the world to compete with each other head-to-head on the basis of raw talent and hard work. And yet, contenders from Laos tend to finish last or close to it in almost any event in which they compete.
One Laotian athlete garnered the unenviable record of having been the slowest entrant in the nearly half-century long history of the kilometer walk. Why do Laotians fare so poorly and Americans so well, with athletes from other countries falling in between?How can countries measure the well-being of their citizens?
Johnson and Ayfer Ali have been able to predict with astonishing accuracy the number of medals different countries will win on the basis of a handful of factors, including population, climate, political structure, and real per capita GDP.
For example, they predicted that the United States would win medals in Athens and that is precisely how many the United States won. They predicted medals for the United States in Beijing; were won.
They did not expect the Laotians to win any medals in either Athens or Beijing, and that was indeed the outcome. The good news is that as the per capita real GDP in some relatively poor countries has risen, the improved living standards have led to increased Olympic medal counts.
China, for instance, won 28 medals in and 63 in As the host for the games, it won an impressive total of medals. While not a perfect measure of the well-being of people in a country, per capita real GDP does tell us about the opportunities available to the average citizen in a country. Americans would surely find it hard to imagine living at the level of consumption of the average Laotian.
In The Progress Paradox: How Life Gets Better While People Feel Worse, essayist Gregg Easterbrook notes that a higher material standard of living is not associated with higher reported happiness. After all, that is what GDP measures. Apart from an abundance of consumer goods, a high GDP brings other more basic advantages. There are differences between rich and poor countries with regard to some important socio-economic indicators of well-being, such as life expectancy at birthinfant and child mortality rates, number of doctors, better nutrition and educational opportunity.
On some of the most basic measures of human welfare, the developing countries like India and Pakistan fare much worse than the industrial countries. On average, in some important dimension of human well-being, such as literacy and education rates, high GDP countries also have the advantage. Due to their surplus financial capital, they can make more investment in human capital for enhancing total factor productivity.
New technologies have been developed for entertainment, travel, information, and health. A much wider variety of basic products like food and clothing is available today than several decades ago. GDP does not capture leisure, health, a cleaner environment, the possibilities created by new technology, or an increase in variety.
What does GDP really tell us about economic growth?
On the other side, rates of crime, levels of traffic congestion, and inequality of incomes are higher in the United States now than they were in the s. Moreover, a substantial number of services that used to be provided, primarily by women, in the nonmarket economy are now part of the market economy that is counted by GDP.
By ignoring these factors, GDP would tend to overstate the true rise in the standard of living. GDP is rough, but useful A high level of GDP should not be the only goal of macroeconomic policy—or broader government policy.
But, even though GDP does not measure the broader standard of living with any precision, it does measure production well, and it does indicate when a country is materially better or worse off in terms of jobs and incomes. In most countries, a significantly higher GDP per capita occurs hand in hand with other improvements in everyday life along many dimensions, like education, health, and environmental protection.
No single number can capture all the elements of a concept as broad as standard of living. Nonetheless, GDP per capita is a reasonable, rough-and-ready measure of the standard of living. Calculating GDP is quite an undertaking.
Real GDP informs us that the recession of to was a severe one and that the recovery from that has been slow but is improving. Self-check question Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. The environment becomes dirtier.
How well GDP measures the well-being of society (article) | Khan Academy
A greater variety of goods become available to consumer. A lower crime rate would raise the broad standard of living, but it would not be counted directly in GDP, so a rise in GDP would understate the standard of living. A greater variety of goods would raise the broad standard of living, but it would not be counted directly in GDP, so a rise in GDP would understate the rise in the standard of living.