Tuesday, January 13, 2009

NY Times on GDP and well being

An interesting article in the New York Times (August 30, 2008) covers some of the issues we discussed today in terms of GDP as a measure of well-being.

An important point that we did not cover in class is that GDP or its average (GDP per capita) does not reveal anything about the distribution of income. So, for example, two countries could have GDP per capita of $50,000 as follows:

Country A, population 300,000:
100,000 people with income = $30,000
100,000 people with income = $50,000
100,000 people with income = $70,000

Country B, population 300,000:
299,999 people with income = $1,000
1 person with income = $14,701,000,000

Both have the same per capita GDP, so look the same on paper.
But, where would you rather live?

What else does GDP not account for?


  1. Someone with a shallow knowledge of what the GDP consists of may believe that it accurately represents a country's well being. However, the people who publish the GDP (Bureau of Economic Analysis) know that it's not conclusive when dealing with overall well-being. So, why have they been publishing it under that guise for so long? It's like they spilt the proverbial milk, but no one saw, so they just let it sink in. Well as knowledge becomes greater and easier to attain, more and more people see the milk. I think it's time for the BEA to clean up their mess and figure out a new way to measure well-being. For the time being they should at least put a disclaimer on the GDP when they publish it so that people don't wonder why it's increasing, but they've gone from the suburbs to a van down by the river.

    How would gifts given to people in foreign countries factor into both GDPs? For example my brother lives in Europe and I gave him a watch for christmas.

    Also, why does the BEA website use the phrase "real GDP." Is that any different from GDP?


  2. The watch would not factor into GDP unless it was purchased in that European country. Also, "real GDP" is the GDP number adjusted for inflation (using an inflation index) as opposed to "nominal GDP" which is not adjusted for inflation.

    Although I do not believe GDP is an appropriate measure of well-being for a country, I do see why it is so widely-used. It is generally relatively easy to calculate (compared to a number that takes into account health, natural capital, ect.) so that real-time decisions can be made. When your real interest rates are plummeting and there's no liquidity in your economy, there has to be a number that can be calculated relatively quickly to assess the health of the country (economically speaking). What may be a better possibility until a quicker method for calculation can be achieved, is for a different measure (incorporating the above-mentioned items) to be taken annually. This gives more time for calculation and could be used when making policy decisions on a cost-benefit analysis basis (eg. If the government wants to build 10 new coal plants that would generate $3 billion in revenue, one can show that on a long-term basis, it may cost $6 billion in environmental damage).

  3. One component left out of the GDP calculation, as discussed in class, is the black market. That being said, let me make it abundantly clear that I do not advocate the legalization of Marijuana, nor do I feel that is anything but a degenerative scourge on society which is effectively hindering the furtherment of societal morality and basic family values; however, ABC News reports that it is (and has been for the past three decades) the number one cash crop in the U.S. Check this link out, some of the numbers are quite compelling.The numbers are huge.

  4. When I look at GDP and the standard of living, I wonder why no one has attempted to change the formula for this. We all know it isn't accurate, so why do we still use it? In the U.S. 5% of our population accounts for more than 50% of our wealth. What does that say about us? Those 5% are the outliers that are driving our GDP up but not our standard of living.