hooray for gdp

7/23/2019 Hooray for GDP

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Hooray for GDP! GDP as a measure ofwellbeing

Nicholas Oulton22 December 2012

Senior Visiting Research Fellow at the Centre for Economic Performance, London School of Economics

he m!ch"lo#ed English $oet %ohn &et'eman is re$orted to ha#e said on his deathbed that the

one thing he regretted in his life was not ha#ing had more se() his $ro#ides a seasonall*

rele#ant, if somewhat off"colo!r, reminder that there is more to life than '!st b!*ing and

cons!ming st!ff) +nd that is what DP meas!res - the o!t$!t of goods and ser#ices on which

we collecti#el* s$end o!r income)

.an* $eo$le toda* wo!ld sa* that $romoting the growth of DP is !ndesirable or e#en

irres$onsible) Some economists see ha$$iness as /a more ambitio!s and la!dable $olic*ob'ecti#e see, for e(am$le, raham 2011) 3n a recent $a$er s!bmitted as e#idence to the

LSEs rowth Commission, 3 consider three common criticisms of DP as a target of $olic* and

e($lain wh* 3 thin4 the* are wrong 5!lton, 2012a6

he first criticism is that DP is ho$elessl* flawed as a meas!re of h!man welfare) For

e(am$le, the arg!ment goes, it ta4es no acco!nt of $oll!tion)

he second criticism is that DP ignores distrib!tion) 3n a rich co!ntr* li4e the 7S, some

sa*, the t*$ical $erson or famil* has seen little or no benefit from growth since the 1890s)

+t the same time, ine:!alit* has risen shar$l*)

he third criticism is that abo#e a certain le#el, a higher material standard of li#ing does

not ma4e $eo$le ha$$ier) his #iew concl!des that we sho!ld sto$ tr*ing to raise DP and

loo4 instead for $olicies that $romote ha$$iness)

GDP is a awed measure of human welfare

DP has alwa*s been a meas!re of output, not of welfare) 7sing c!rrent $rices, it meas!res the

#al!e of goods and ser#ices $rod!ced for final cons!m$tion, $ri#ate and $!blic, $resent and

f!t!re) F!t!re cons!m$tion is co#ered since DP incl!des o!t$!t of in#estment goods)

Con#erting to constant $rices ma4es it $ossible to calc!late the growth of DP o#er time or the

differences between co!ntries across s$ace)

&!t altho!gh DP is not a measure of h!man welfare, it can be considered a component of

welfare) he #ol!me of goods and ser#ices a#ailable to the a#erage $erson clearl* contrib!tes

to welfare in the wider sense, tho!gh of co!rse it is far from being the onl* com$onent) So it is

$ossible to imagine a social welfare f!nction that has DP as one of its com$onents alongside

health, e:!alit*, h!man rights, etc)

DP is also an indicator of h!man welfare) 3n cross"co!ntr* data, DP $er ca$ita is highl*

correlated with other factors that are im$ortant for welfare) 3n $artic!lar, it is $ositi#el* correlated

with life e($ectanc* and negati#el* correlated with infant mortalit* and ine:!alit*) Since $arents


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nat!rall* feel grief for children the* ha#e lost, infant mortalit* might be tho!ght of as an indicator

of ha$$iness)

Fig!res 1"; ill!strate these facts for large sam$les of co!ntries, $lotting ho!sehold cons!m$tion

$er ca$ita which closel* trac4s DP $er ca$ita against three meas!res of h!man welfare)

he* show that richer co!ntries tend to ha#e greater life e($ectanc*, lower infant mortalit* andlower ine:!alit*) 5f co!rse, correlation is not necessaril* ca!sation, altho!gh there is a strong

case for the #iew that higher DP $er ca$ita leads to im$ro#ed health Fogel 200


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Source6 5!lton 2012b)

Figure 3 he relationshi$ between a co!ntr*s ho!sehold cons!m$tion $er head and its

ine:!alit*

Source6 5!lton 2012b)


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+ccording to the Commission on the .eas!rement of Economic Performance, $olic* sho!ld be

concerned with wellbeing, which encom$asses man* dimensions, incl!ding material li#ing

standards, health, ed!cation, $olitical #oice, social relationshi$s and the en#ironment Stiglit= et

al 2008) 3n res$onse to the Commissions re$ort, both the 5ECD and the 7>s 5ffice for

?ational Statistics are now de#elo$ing meas!res of these as$ects of life)

Few will disagree that these dimensions of life are im$ortant for h!man welfare and no one can

ob'ect to im$ro#ed meas!rement) &!t for e(am$le, for the 7>, 3 :!estion whether the 5?S is

ca$able of ta4ing on a $otentiall* #ast new $rogramme when e#en the basic economic statistics

on which DP rests are not f!ll* in accordance with the 5ECDs best $ractices for meas!ring

$rod!cti#it* and ca$ital 5!lton 200


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1959-72 1972-82 1982-89 1989-2000 2000-04 2004-07 1959-2

1) E:!i#alent media L3.E@ 0)8


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dis$!ted b* Ste#enson and @olfers 200 is for the 7S and the res!lt is 4nown as the /Easterlin

$arado( Easterlin 189


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Lets $erform a sim$le tho!ght e($eriment) 3magine that o#er the 220 or so *ears since the

3nd!strial Re#ol!tion began,process inno#ation has ta4en $lace at the historicall* obser#ed rate

b!t that there has been noproduct inno#ation in consumer goods tho!gh 3 allow $rod!ct

inno#ation incapital goods)

7> DP $er ca$ita has risen b* a factor of abo!t 12 since 100 .addison 200;) So $eo$letoda* wo!ld ha#e $otentiall* #astl* higher incomes than the* did then) &!t the* can onl* s$end

their incomes on the cons!mer goods and ser#ices that were a#ailable in 100)

3n those da*s, most cons!mer e($endit!re was on food at least A0 of the t*$ical famil*

b!dget, heat wood or coal, lighting candles and clothing mostl* made from wool or leather)

L!(!ries li4e horse"drawn carriages were a#ailable to the rich and in m* imaginar* world, the*

wo!ld now be a#ailable to man* more) &!t there wo!ld be no cars, refrigerators, washing

machines or dishwashers, no radio, cinema, V or internet, no rail or air tra#el and no modern

healthcare s!ch as antibiotics and antise$tics)

Iow man* ho!rs a wee4, how man* wee4s a *ear and how man* *ears o!t of an e($ectedlifetime wo!ld the a#erage $erson be willing to wor4 .* g!ess is that in this imaginar* world,

$eo$le wo!ld wor4 a lot less and ta4e a lot more leis!re than real $eo$le do toda*)

+fter all, most cons!mer e($endit!re nowada*s goes on $rod!cts that were not a#ailable in

100 and a lot goes on $rod!cts not in#ented e#en b* 180) oda*, onl* abo!t 10 of the

famil* b!dget goes on food - and e#en within the food bas4et, man* items s!ch as microwa#e"

read* chic4en ti44a masala, the 7>s national dish were not a#ailable in 100)

3n s!mmar*, $eo$les choices between labo!r and leis!re demonstrate that the* #al!e higher

cons!m$tion in an absol!te sense, not '!st a relati#e sense) So rising DP $er ca$ita wo!ld be

in accordance with $eo$les desires and $references) Philoso$hers and social critics ma* ob'ectthat the a#erage $ersons desires and $references are tri#ial, ill informed and misg!ided an

attit!de which can be traced bac4 at least as far as Platos Re$!blic) &!t in a democrac*,

$eo$les $references sho!ld be res$ected)

Editors note: this piece first appeared in CentrePiecemagazine (Centre for Economic

Performance, LSE)
http://cep.lse.ac.uk/centrepiece/http://cep.lse.ac.uk/centrepiece/

hooray for gdp

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