Unit 3: Why GDP Fails Flashcards
5 problems with GDP
1) Counts “bads” and “goods”
2) Makes no adjustment for leisure time
3) Only counts goods that go through official, organized markets
4) Doesn’t adjust for goods distribution
5) Isn’t adjusted for pollution costs
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
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
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
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 left over. 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
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.
Identify and explain an additional problem with GDP that was raised at the 2016 World Economic Forum in Davos, Switzerland.
.
Additional problem with GDP is its inability to 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
Identify and make notes when applicable the seven alternative measures to GDP mentioned in the article.
- 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;
- “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.”
-direct measures of well-being such as the Happy Planet Index, - Gross National Happiness
- National Well-Being Accounts
According to the article, what is the main problem with GDP that the alternatives fail to address as well?
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.
What do economists and the public care about that GDP and the alternatives fail to fully measure?
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.
