Shortcomings of GDP as a Measure of Wellbeing

The main purpose of GDP is to measure a country’s production Opens in new window.

GDP is also frequently used, though, as a measure of wellbeing.

For example, newspaper and magazine articles will show tables with levels of GDP per person in different countries, with the implication that people in the countries with higher levels of GDP are better off.

Although increases in GDP often do lead to increases in the wellbeing of the population, and have been extremely important in reducing poverty in many parts of the world, it is important to be aware that GDP is not a perfect measure of wellbeing for several reasons briefly discussed below.

The Distribution of GDP

When measuring the wellbeing of a country’s population, what is important is not only the level of GDP but also how the income and output are distributed among the population.

If the income generated from production is concentrated among only a small part of the population, economic wellbeing may be unchanged or become relatively worse for other sections of the population.

This raises the issue of equity in the distribution of income, an issue that taxation, social welfare payments and government intervention can address.

The Value of Leisure Is Not Included in GDP

If an economic consultant decides to retire, GDP will decline even though the consultant may value increased leisure more than the income the consultant was earning running a consulting firm.

The consultant’s wellbeing has increased, but GDP has decreased.

In 1914 the typical full-time Australian worked 49 hours per week. Today, the typical Australian works fewer than 40 hours per week.

If Australians still worked 49-hour per weeks GDP would be much higher than it is, but the wellbeing of the typical person may be lower, because less time would be available for leisure activities.

The Level and Quality of Health Care and Education

GDP is a measure of the market value of a country’s production; however, it takes no account of the composition of the goods and services produced.

The availability and quality of health care facilities and education are strongly linked to the standard of living in a country.

For example, production levels may be high but the availability of health care may be limited, or too expensive for many people to afford.

Any measure of wellbeing must include measures of access and affordability of essential goods and services.

Further, when examining the composition of GDP, it is possible for GDP to be growing, but the provision of consumer goods and services to be low.

Examples of this have been seen during periods of war, when a country’s productive resources have been diverted from consumer goods to the production of armaments.

GDP Is Not Adjusted for Pollution or Other Negative Effects of Production

When a dry cleaner cleans and presses clothes the value of this service is included in GDP.

If the chemicals used by the dry cleaner pollute the air or water, GDP is not adjusted to compensate for the costs of the pollution. Similarly, the value of cigarettes produced is included in GDP with no adjustment made for the costs of the lung cancer that some smokers develop.

If a country decided to log all its forests, its GDP would rise but the natural environment would be depleted and atmospheric carbon dioxide would rise.

We should note, however, that increasing GDP can lead countries to devote more resources to pollution reduction.

Developing countries often have higher levels of pollution than high-income countries because the lower GDPs of the developing countries make them more reluctant to spend resources on pollution reduction.

Levels of pollution in China are much higher than in Australia, the United States, Japan or the countries of Western Europe.

According to the World Health Organization, seven of the 10 most polluted cities in the world are in China, but as Chinese GDP continues to rise, it is likely to devote more resources to reducing pollution.

GDP Is Not Adjusted for Changes in Crime and Other Social Problems

An increase in crime will reduce wellbeing but may actually increase GDP if it leads to greater spending on police, security guards and alarm systems.

GDP is also not adjusted for changes in divorce rates, drug addiction or other factors that may affect people’s wellbeing.

To summarize, we can say that a person’s wellbeing depends on many factors that are not taken into account in calculating GDP.

Because GDP is designed to measure total production, Opens in new window it is perhaps not surprising that it does an imperfect job of measuring wellbeing.