Gross Domestic Product and Economic Well-being

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Gross Domestic Product and Economic Well-being

The well-being of people refers to the degree of happiness people derive from their economy. Although it is largely synonymous to the quality of life, it encompasses many other ethical aspects that include the welfare of both present and future generations. As a result, the quality of life is just a fragment of economic well-being. Gross Domestic Product (GDP) on the other hand is the total value of all goods and services produced in a country for a given period. Normally, people tend to associate growth in GDP with a rise in economic well-being. However, there is widespread concurrence amongst economists that GDP is not a suitable scorecard for well-being (Costanza, Hart, Talberth, & Posner, 2009). For this reason, this paper intends to demonstrate the shortcomings that make GDP an insufficient measure for economic well-being. Also, it will highlight substitute economic variables that can best measure the well-being of people.

Firstly, the GDP of a country includes economic indicators such as depreciation, income to foreigners, and massive expenditures on regrettables such as military budgets that do not have a direct impact on well-being (Bergheim & Schneider 2006). Secondly, it does not measure non-market activities such as volunteer work that influence the welfare of people. Thirdly, GDP ignores non-economic dimensions such as life expectancy, safety, clean environment, and good health that influence well-being. Finally, GDP only measures the level of economic activity in a given country and it fails to measure vital demographic elements such as wealth distribution or the income disparity that exists between the poor and the rich.

To modify GDP so that it can gauge the quality of life, many analysts prefer to use variations in GDP per capita. Notwithstanding, a rise in GDP per capita does not necessarily translate into well-being. For instance, despite the U.S. doubling its GDP per capita between the years 1972 and 2002, the happiness of Americans remained relatively constant (Clark & Senik, 2011). To determine well-being more accurately, drastic measures such as self-reports of individual people and the Gross Progress Indicator (GPI) that measures the sustainability of income should be used. Also, Green GDP that measures environmental sustainability of an economy can be introduced.

References

Bergheim, S., & Schneider, S. (2006). Measures of well-being. There is more to it than GDP. Deutsche Bank Research, Frankfurt.

Clark, A., & Senik, C. (2011). Will GDP growth increase happiness in developing countries? IZA Discussion Paper No. 5595.

Costanza, R., Hart, M., Talberth, J., & Posner, S. (2009). Beyond GDP: The need for new measures of progress. The pardee papers.