By: Lawrence Zhang
How do we measure the economic well-being of a country? Despite the popularity of the Gross Domestic Product (GDP) as the end-all-be-all measure of economic activity, many would argue that GDP is far from the best way to measure economic well-being.
From news reports, to speeches by politicians, to international publications, GDP is indisputably the most well-known and most commonly used measure of a country’s economic activity. Since GDP was adopted by the international community at the Bretton Woods Conference in 1944, growing one’s GDP has been the top priority for many governments around the world. This measure of the value of all goods and services produced in a country is used to compare the growth of countries, as a stand-in for societal well-being, and as justification of government policies intended to create a rich and prosperous economy.
To measure the size or health of an economy purely by its output ignores numerous other important factors. Criticisms of GDP as a measure of wellbeing are frequent and well-documented. Even its creator, economist Simon Kuznets, noted that GDP would likely be misused and misinterpreted, and that “the welfare of a nation can, therefore, scarcely be inferred from a measurement of national income”. Yet, despite the well-founded claims that a country’s GDP does not sufficiently measure economic welfare, every single country in the world, including Canada, still uses GDP to measure its own economic strength.
Certainly, before even discussing why this claim is so commonly made, it is important to recognize that GDP is useful in certain ways, namely in measuring the total income a nation earns from its production, and how government policies may come to affect this. However, beyond that, GDP is not always a good indicator of the health or strength of an economy. Some of the most common criticisms of GDP is that it does not even remotely factor the environmental impact of a country’s economic growth or the quality of life and happiness of its people, or how its growth doesn’t even necessarily mean better health and education for anyone.
GDP was not designed to measure every economic aspect of a state, but the measure has been stretched over time to try and represent the well-being of an economy. Even so, in an era of economic insecurity despite growing GDPs, the measure does not even represent pure economic activity as well as it is seen to.
Another major criticism of GDP is that it lacks any way to account for inequality within a nation. An economy can have a high GDP per capita while still having a great deal of wealth and income inequality. Despite the adjusted GDP per capita for Singapore being almost 7 times higher than Peru, both rank similarly as being in the top 30% of all the world’s countries by wealth inequality.
GDP also counts what we might consider certain harmful outcomes to be desirable growth. When a devastating earthquake struck Sichuan Province in China in May of 2008, more than 80,000 innocent people lost their lives and many cities were reduced to little more than rubble. Yet, by the end of the year, due to rebuilding efforts funded by massive spending from both the government and private sector, estimates put the earthquake as increasing China’s GDP by almost 3% that year, after factoring in the massive loss of life, production capacity, and infrastructure. Similarly, when a country’s primary source of income is a socially harmful good, should we count the economic the same way as economic growth from socially conscious goods?
The sustainability of growth, in terms of consumption of assets and security of its continued growth also poses a challenge to GDP as a measure of economic strength. A country that invests all of its talent and energy into rapidly developing and selling off its finite natural resources cannot, by definition, continue in perpetuity. Some countries pursue GDP growth at the expense of its long-term welfare, discounting the future costs out of political expediency or in a competitive economic arms race with other countries.
GDP also does not consider the quality of the inputs, such as labour, that goes into the production of the output it measures. Japan and France have similar adjusted GDP per capita, meaning the two countries produce roughly the same in terms of the value of their goods and services. But Japanese workers worked an average of 200 more hours than French workers in 2017. How does GDP account for this?
With all its glaring faults, it is a wonder that we still use GDP to measure economic growth. One would imagine that governments would be clamoring to find more accurate measures of public policy outcomes and of the well-being of its citizens. However, no consensus has been reached yet as to how societies should go about throwing off the yoke of GDP as the ultimate measure of an economy.
Some economists and scholars have turned to indexing different measures of economic welfare to better incorporate how multi-faceted measures of economic well-being ought to be, like the OECD’s (Organization for Economic Co-operation and Development) Better Life Index, which considers 11 dimensions of economic well-being, like income, environment, health, and work-life balance.
With how widely and publicly known the faults of GDP are, why are we not actively seeking out alternatives that will help us better identify the weak points in an age of increasing income inequality and environmental calamity? It’s time for the Canadian government to think about this problem seriously and consider using something else.
Lawrence Zhang is currently a first year Master of Public Policy Candidate at the University of Toronto’s Munk School of Global Affairs and Public Policy. He is interested in immigration policy, infrastructure policy, and big questions around how we will future-proof the economy. He previously worked in politics and is doing his best to adjust to the life of a student again.