GDP is a measure of economic activity, not economic well-being

GDP is a measure of economic activity, not economic well-being

Since its creation, economists who are familiar with GDP and SNA methodology have emphasized that GDP is a measure of economic activity, not economic well-being.

In 1934, Simon Kuznets, the chief architect of the United States national accounting system, cautioned against equating GDP growth with economic or social well-being.

The US Bureau of Economic Analysis’ description of GDP states the purpose of measuring GDP is to answer questions such as:

  • How fast is the economy growing?
  • What is the pattern of spending on goods and services?
  • What percent of the increase in production is due to inflation?
  • How much of the income produced is being used for consumption as opposed to investment or savings?

To understand how GDP continues to be misused as a scorecard for national well-being, it is important to consider how the current system has evolved. It is also important to recognize that GDP is not inherently bad it measures what it measures. Rather it is being misused as an indicator of something it doesn’t measure and was never intended to measure.

Economists have warned since its introduction that GDP is a specialized tool, and treating it as an indicator of general well-being is inaccurate and dangerous.

However, over the last 80 years economic growth measured by GDP has become the sine qua non for economic progress. Per capita GDP is frequently used to compare quality of life in different countries. Governments often use changes in GDP as an indicator of the success of economic and fiscal policies.

A number of ways of measuring national-level progress have been proposed, developed, and used to address this growing realization that GDP is a measure of economic quantity, not economic quality or welfare, let alone social or environmental well-being. The measures also address the concern that GDP’s emphasis on quantity encourages depletion of social and natural capital and other policies that undermine quality of life for future generations.

In general, these new measures can be categorized as:

(1) indexes that address the issues described above by making corrections to existing GDP and SNA accounts;

(2) indexes that measure aspects of well-being directly;

(3) composite indexes that combine approaches; and

(4) indicator suites.

Like GDP, all these measures are abstracted indicators showing a view from 30,000 feet, not comprehensive reports on the heart and soul of individual communities. However, some can and are being used to inform local and regional decisions. This is an improvement on the misuse of GDP and economic growth as a proxy for well-being.

The quality of life in the United States depends on many different variables and GDP is only a small portion of this. GDP growth does help; however, the quality of life will not start improving until we can significantly lower the unemployment rate and get salaries back in check with the rate of inflation.

The appliance of GDP as to measure wealth for a society is undoubtedly misleading and does not serve the purpose of economics as sustaining wealth within its complex surrounding and inherent correlations. The GDP does not recognize the dimension of interrelation, not to say the very dependence of the economic system on its surrounding.

It is in our hands to control numbers and design the framework that corresponds to the world’s system we are bounded to so all people can evolve to their upmost potential and contribute the most to increase wealth.

It is not the car driver that causes an accident, but the designer that allows cars to crash.

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