The professionals and cons of GDP as an indicator of prosperity –
Is GDP still relevant as an indicator of prosperity?
What is GDP? Gross Domestic Product is an economic indicator that reflects the monetary value of all final goods and services produced by an area in a given period. In simple terms, it is used to measure the wealth generated by a country.
GDP is probably the most important economic indicator in business news. He is always quoted when reporting on a country’s economic dynamism or prosperity. Wealth and GDP are often subliminally equated. This comparison provokes criticism. Parts of society are demanding that the previous measurement of wealth be put to the test.
Prosperity should be decoupled from growth in the future. Therefore, instead of gross domestic product, there should be another measure of prosperity and a new form of economic reporting in order to measure ecological, social and societal developments in addition to economic ones.
GDP is not a measure of human well-being
The equation of wealth and gross domestic product has long been criticized. Already in the first half of the last century, renowned economists discussed controversially whether a single compressed indicator can correctly reflect people’s well-being. In fact, there are good reasons not to interpret the level of gross domestic product simply as an accurate indicator of people’s well-being. Three examples may illustrate this:
1. GDP contains variables that only compensate for losses in prosperity. For example, after natural disasters such as devastating storms or floods, the reconstruction work is booked as GDP growth and thus as wealth gain, when in fact only damaged or lost assets were restored.
2. GDP does not include a number of wealth-changing effects. A classic example is unpaid housework. Do-it-yourself work undoubtedly increases wealth, but it is not recorded in the GDP account (only the materials bought for it, not the work done).
3. The conditions under which GDP is created are not taken into account. For example, whether someone is relaxed and enjoys their work or whether it is under great physical or mental stress and without any joy plays a large role in the well-being of the person concerned – even if the end result is the same income in both cases. However, for the calculation of GDP, both cases are completely equivalent.
Other wealth indicators already available
The examples show that GDP is obviously not an ideal measure of prosperity, but only a good indicator of a country’s economic dynamism. Economists largely agree that GDP is simply a metric used to measure market performance and income. For this reason, there have long been efforts on the part of politicians and international organizations to record the quality of life quantitatively using other, often social indicators. Obviously, GDP is no longer trusted as the sole indicator.
The OECD developed the “Better Life Index” to determine social well-being based on eleven subject areas – including education, security and work-life balance – and to compare it internationally. The OECD is trying to broaden its perspective and move away from purely economic GDP data.
There is no shortage of key figures that can be used to depict prosperity and social progress beyond GDP figures. However, it should be noted that such soft indicators can be vulnerable to political interference.
GDP is often the right measure
GDP will continue to be a very important indicator because material opportunities contribute significantly to people’s well-being – even if the current zeitgeist sometimes suggests the opposite. As a key figure in the national accounts, GDP must not be diluted. Rather, the existing indicators should be used in the right place. With the softer indicators of prosperity, politicians can gain valuable insights into what is important to citizens besides economic issues.
However, when it comes to the question of how sustainable a country’s national debt is, a hard indicator such as GDP will also have to be considered in future. Because whether a country can repay its debts depends to a large extent on its economic strength, i.e. on the level of gross domestic product. In addition, feel-good indicators would be the wrong measure here, because debts can only be repaid from a state’s income – the reference to clean air or happy people will not make creditors shy away from their claims.