four limitations of using gdp to measure economic growth

How should we measure changes in an economy's standard of life, operating room comparability people standards across countries? Typically, economists use GDP proportionate A a proxy for a country's standard of living, just arsenic International Monetary Fund head Christine Lagarde, Nobel prize-winning economist Joseph Stiglitz and MIT professor Erik Brynjolfsson illustrious at the freshly concluded World Economic Forum in Davos, Switzerland, "GDP is a poor room of assessing the health of our economies and we desperately need to see a new valuate."

Victimization GDP as a measure of welfare has familiar problems, which are among the first things macroeconomics principles courses extend. But the point of the discussions at Davos is that in the extremity 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 mostly call attention five problems with exploitation GDP As a measure of comfortably-being:

GDP counts "bads" as well American Samoa "goods." When an earthquake hits and requires rebuilding, GDP increases. When someone gets sick and money is tired on their care, it's counted as part of GDP. But nobody would argue that we're major 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 working day averages 12 hours, while in the other it's exclusive eight. Which country would you preferably sleep in?
GDP only counts goods that infiltrate semiofficial, organized markets, and so IT misses location production and black market activity. This is a big omission, specially in developing countries where much of what's used up is produced at interior (or obtained through swop). This also means if people begin hiring others to clean their homes instead of doing information technology themselves, or if they go out to dinner instead of cooking at home, GDP will appear to grow steady though the total amount produced hasn't changed.
GDP doesn't adjust for the dispersion of goods. Once more, imagine two economies, but this time one has a ruler who gets 90 percent of what's produced, and everyone other subsists -- barely -- on what's left. In the back, the dispersion is well more equitable. In both cases, GDP per capita will be the same, simply IT's clear which saving I'd sort o sleep in.
GDP isn't adjusted for pollution costs. If ii economies have the same Gross domestic product per capita, but one has polluted air and water while the another doesn't, advisable-being will be different but GDP per capita South Korean won't becharm it.

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The Davos discussion, however, is pointed at a distinct 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 endure, instantaneous information and so on. Because it's free, on that point's no direction to economic consumption prices -- our willingness to invite out the good -- as a measure of how a lot we value it.

As a result, GDP statistics won't capture the benefits we gain from free apps, just equally 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 "special K GDP," which attempts to adjust for environmental factors; the OECD's "GDP alternatives," which set 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 every bit income distribution, adds factors such as the value of household and offer work, and subtracts factors such every bit the costs of crime and pollution."

Finally, there are much direct measures of well-organism so much As the Elated Planet Index, Gross National Felicity and National Eudaemonia Accounts.

However, none of these alternatives deal with the main problem discussed in Davos -- how to measure the ladened impact of engineering science on our lives. The job is that Gross domestic product assigns a zero value to goods with a set terms, only those goods aren't valued at goose egg and as they become more prominent, we'll need to ascertain a way of including the benefits they provide in our measures of the standard of life.

None of the measures projected up to now are perfect, and they won't put back the current GDP yard measure anytime soon.

But there's still something to be gained from this work. When you hear that your standard of animation has bypast up, ask yourself what has happened to leisure time -- are you functional more OR less for the same income? How much of engineering science's benefits might consume been lost -- how often answer you use Wikipedia? You bet was the additional GDP distributed across the universe -- did it mostly go to the 1 percent?

In the end, economists -- and the public -- don't caution about GDP by itself; they care nigh the happiness they receive from the goods and services they consume. We've made some progress on measurement the well-organism of individuals within an economy, merely non enough. More research is needful.

Mark Thoma

View all articles by Mark Thoma on CBS MoneyWatch»
Mark Thoma is a macroeconomist and time-series econometrist at the University of OR. His research focuses on how monetary policy affects the economy, and He has worked connected view trade cycle models. Mark is presently a fellow at The Century Foundation, and he blogs every day at Economist's View.

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