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How representative is GDP of a nation's wealth?

A growing number of economists believe that the Gross Domestic Product (GDP) is no longer the best way to measure a country’s progress, and that the time has come to factor in quality of life. A French-sponsored commission aims to find out.

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The Gross Domestic Product’s status as the number one indicator of national progress may be a thing of the past. In just over a month, a commission chaired by economist and Nobel laureate Joseph Stiglitz will suggest new ways of measuring the wealth and well-being of a nation.

 
GDP has come under increasing criticism from economists.
 

“Unfortunately GDP has been misused - it has become the Golden Calf of modern times,” says Dominique Meda, author of ‘Beyond GDP: towards new ways of measuring wealth’.

 

So far the main benchmark for calculating progress has been based on accountancy mathematics - GDP*.

 

“Anything that can be sold and creates added value increases GDP,” adds Raphael Wintrebert, author of ‘Ideas for the Stiglitz Committee’.

 

With this taken into account, even dubious or illegal economic activities, such as drug dealing or use of child labour, is likely to inflate a country’s GDP. That's when it becomes problematic to equalise GDP and progress.

 

GDP was first used by the United States in 1941 when they entered World War II.

 

Since then it has been used by governments across the world as a way to plan their economic policies. It is the single most important indicator for comparing countries’ progress in the modern global era.

 
A farcical situation
 

But now that the concept of sustainable development has emerged, economists argue that the fact that China’s GDP is now higher than Germany’s, for example, is not enough for economists to properly compare the two countries’ real wealth.

 
“We are in the midst of an environmental crisis,” says Meda, adding that to rely on GDP alone has led to some absurd situations. As Wintrebert points out: “Even the money spent cleaning up the pollution following the Erika oil spill (the Erika sank off the coast of France in 1999, spilling 20,000 tonnes of oil) had a positive impact on the calculation of France’s GDP.”
 
“To rely on just GDP is dangerous – it is insufficient to tell us if and when we are up against the wall,” Meda concludes.
 

The Stiglitz committee, summoned by French President Nicolas Sarkozy, has gathered together no less than five Nobel laureates to brainstorm the issue.

 

The factors that could potentially be used to gauge prosperity include the amount of charitable or volunteer work a country produces, or how much political activity and domestic work are worth. Negative factors could include environmental damage. Social values such as health, education and leisure could also come into the mix.

 

The result would be an index measuring not just pure economic growth, but also the general well-being of a country. But it would have to be simple and straightforward as well, “in order to be credible and discussable”, says Raphael Wintrebert. The commission’s big challenge is to find an entirely new set of universal values that can measure quality of life.

 

* GDP is commonly calculated as: Consumption + Gross Capital Investment + Government Expenditure + (Exports – Imports)

 

 

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