There is very little dispute that economic growth has raised living standards around the world. Additionally, GDP is the most widely used measure of economic growth. Policymakers look to enact policies that grow GDP in order to increase economic prosperity, which in turn, they believe will improve societal well-being. There are some who look at data and see a strong correlation between GDP and societal well-being. However, GDP is essentially just a measure of economic growth. As Kapoor and Debroy (2019) point out, GDP does not take into the costs of economic growth.
Economic growth increases individuals' incomes but can also raise inflation, create boom and bust economic cycles, cause pollution, lead to the loss of non-renewable resources, and open up the potential for widening inequality (Pettinger, 2017). GDP is a limited measure in the fact that it does not account for such costs. If one only considers GDP, as many do, when creating a policy, then they are not necessarily supporting policies that lead to better societal well-being. For instance, many economists believe that monetary policy which sought to boost economic growth in the early 20th century, “led to excessive risk-taking in the U.S. housing market, which eventually brought on the financial crisis” (Wolverson, 2013, para. 7)—an example of economic growth creating a boom and bust economic cycle.
Some countries have taken note of how GDP is limited in what it measures. Some Chinese provinces had completely eliminated GDP growth as an official indicator of government economic achievements in order to focus on environmental concerns (Wolverson, 2013, para. 17). The U.S. Bureau of Economic Analysis has also invested in looking at other measures of economic activity that “better reflect growth disparities across households, sectors, and regions of the country” (Wolverson, 2013, para. 17).
Any tool has its limits, and GDP is no exception. However, GDP is a relatively straightforward measure that does allow us to gain certain insights into how countries are doing economically. Additionally, it might not tell us exactly what is going on with societal well-being, but many make the case that a higher GDP usually supposes a higher level of societal well-being. Although only using GDP as a measurement of economic activity is certainly dangerous, I believe GDP still has good reason to be utilized today.
References
Kapoor, A., & Debroy, B. (2019). GDP in not a measure of human well-being. Harvard Business
Review. https://hbr.org/2019/10/gdp-is-not-a-measure-of-human-well-being
Pettinger, Tejvan. (2017). Costs of Economic Growth. Economics Help.
https://www.economicshelp.org/macroeconomics/economic-
growth/costs/#:~:text=Economic%20growth%20means%20an%20increase,Boom%20an
d%20bust%20economic%20cycles
Wolverson, Roya. (2013). GDP and Economic Policy. Council on Foreign Relations.
https://www.cfr.org/article/gdp-and-economic-policy
Hi Josh!
I think you talk about an important matter that concerns economic development.
As you stated, GDP does help measure the growth of the economy. However, GDP limits
the understanding of the economy. One example you stated that GDP doesn't measure is the amount of inequality within the economy. Not accounting for potential widening inequality simply because the rising GDP can be detrimental to the citizens of the economy. Despite this, a research associate Robert Barro "shows that the overall relationship between income inequality and growth and investment is weak" (NATIONAL BUREAU OF ECONOMIC RESEARCH, 1999). Based on this, you make a great point that GDP does not measure social well-being. And when leaders are looking at what needs to be done to help society, GDP probably should not be the measure to go by.
NATIONAL BUREAU OF ECONOMIC RESEARCH. (1999). Inequality and growth. NBER. Retrieved October 14, 2022, from https://www.nber.org/digest/aug99/inequality-and-growth#:~:text=High%20levels%20of%20inequality%20reduce,NBER%20Research%20Associate%20Robert%20Barro.
Josh,
Thank you for your post. I think that GDP should be used as well as a different system in addition to measure the economic well-being of a nation. GDP misses a very important thing: quality of life. It does not measure things such as health, education, equality of opportunity, the state of the environment or many other indicators. This is important because a country with a high GDP could have a terrible quality of living (such as China). We should at the very least try to make a system that incorporates these factors as well.
Thank you for your post. You bring up a good point, as you discuss that GDP fails to consider the cost of economic growth. A country may appear to be better off than they truly are. Jatin Verma's IAS Academy (2021) shares pitfalls of GDP, "GDP often fails to account for all the things that bring down our welfare and diminish our wellbeing. GDP often doesn’t adequately account for all the welfare gains as well. Not accounting people’s wellbeing. (para.3) I agree, every tool has its limits. A good example is the unemployment rate. It does not take into account discouraged workers, the quality of jobs individuals hold, and part time workers are accounted for as full time workers.
Maybe it would be permissible that other measures can be utilized in conjunction with GDP to help us gain better understanding of our growth less our cost of growth. It is likely that there would be pitfalls with that too, as our economy is very complex. Our economy's sectors are intertwined and dependent on the other. I agree, GDP should continue to be utilized, and keeping its imperfections in mind is crucial.
References
GDP as a measure of economic growth. Jatin Verma's IAS Academy. (2021). Retrieved 2 October 2022, from https://www.jatinverma.org/gdp-as-a-measure-of-economic-growth.