>Is GDP a poor measurement of standard of living? Posted on April 22, 2010 by thebigqs 9 comments >If so why, and what should it be replaced with? Share this:TwitterFacebookLike this:Like Loading... Related Economics
>'Standard of living' is often used interchangably with happiness because they imply similar things. Yet because there are differences I will talk about both standard of living and happiness.GDP stands for Gross Domestic Product. When there is growth in GDP it means that people are producing more. Higher production could be due to longer working hours, new capital, training, resources or any number of other factors. Although not easy to measure it can be measured and as such provides a useful measure of what we are trying to do.Yet why do we want to produce more if not to get money, and why do we want more money if not to be happier? In the last 60 years GDP has grown a huge amount throughout the West. Yet happiness, which can also be measured to a degree even if not as accurately, has stagnated.This iplies that standards of living have not improved. In actual fact they have. But the rise in GDP still does not correlate with the amount of improvement in standards of living for these reasons:. National GDP stats may differ to regional ones. Take the distance between places like Kensington and the poorest areas of London's East End. Between these two areas life expectancy varies by 17 years!. If GDP was an accurate measure for all then why do some of the richest countries in the world having rising numbers of homeless people?. Rising national output may be counter-balanced by negative externalities such as pollution.. As countries increase in wealth and produce more there is a distinct possibility of greater levels of stress and mental illness. Over the past 20 years the number of people working for longer than 48 hours a week has risen by millions in Britain alone!. Fast growth today may lead to an over-exploitation of scarce resources.. If a large quantity of growth comes within the informal/shadow economy then this growth may be hard, if not impossible to tax. That's clearly not conducive to long term development or rising living standards.Clearly then GDP is only one measurement for improving both standard of living and happiness (with standards of living also only one factor in the pursuit of happiness).
>Well to be fair to GDP, it's not a measure of happiness at all, let alone a poor one.It's the implicit assumption made between, as you say, rising productivity and raising living standards. If we raise living standards, then by definition we are reducing poverty. The less impoverished you are, the less unhappy you are. Ergo, increased wealth results in increased happiness.But this argument rests on an assumption that they are perfectly correlated. Given the reasons you have put forward, and a number of others, it is more correct to assume that the correlation is only strong at the bottom end.Once people attain an acceptable standard of living, then increased wealth and increased happiness start to diverge.In fact a good analogy would be water. When you are dying of thirst you need water. It is the only thing that can extend your life. Then, while you are thirsty, your consumption of water results in high degrees of happiness.Finally, when you have enough water for your basic needs, the excess water illicits little happiness.Basically the law of diminishing marginal returns.
>Let me take an extreme hypothetical situation to argue that GDP does not necessarily raise the standard of living of the citizens – or at least the rise in standard of living may not be be the same degree as the rise in GDP.Imagine a small simple economy which manages to bring in one very large FDI (foreign direct investment). This FDI represents almost the entire economy's GDP. It employs only foreigners and its value-added is appropriated entirely by the foreign owner, the foreign employees and a fraction by the government.In such an imaginary economy, the citizen's standard of living would not change much despite the rise in GDP. Well, perhaps the standard of living might improve a little if the government uses whatever revenue it receives from this FDI to improved its services.Of course, what I have described is an extreme hypothetical situation.in reality, as many developing economies have shown, FDI and the resultant increasing GDP has brought improved standard of living. Alas in most cases these also brought increased pollution and other environmental degradation.
>The topic is currently being debated at the Economist. See here: http://www.economist.com/debate/days/view/502
>I agree with everything said. Sean talked about diminishing marginal utility in relation to GDP. This has actually been proven in relation not only to Economics but also Psychology. Getting someone up above the poverty line is almost guaranteed to increase their standard of living and happiness (I did point out that they're different; I just thought it important to address because many people consider them intrinsically linked). But thereafter the correlation becomes significantly weaker. Now the problem is that GDP does not take this into account. GDP can rise along with income inequality, as indeed it has done in the UK, and I think the US too. In these circumstances those below the poverty line, and therefore with low standards of living can actually increase in number with rising GDP.I think the "extreme hypothetical situation" is basically trickle down theory i.e. if all the profits from productivity growth go to the richest few trickle down theory says that the benefits will trickle down to the poorest because the richest will be able to afford to expand their business, hire new labour etc. But as you pointed out, and indeed we learnt throughout the 80s and 90s, trickle down theory does not usually work.FDI on the other hand is usually a good thing because it doesn't mean all the profits go to the rich. FDI has been a good thing in the Newly Industiralised Countries precisely because unlike in the example above, native workers were hired. Often working conditions, hours and pay too were dire. But on the whole most people questionned who work in these industries tend to be glad for them because they can put bits of money aside and look forward to an increased standard of living in the future.This is why I think GDP is a useful measure, but should not be considered the only one.
>Let me coin the term material standard of living – i.e. measuring the economic well being of people.When GDP increases, material standard of living probably will also rise, but this is not a direct relationship. Conversely, when GDP decreases, material standard of living cannot rise – here I think the relationship is direct. Perhaps, a more direct measure is the relationship between material standard of living and the income level of people.The income level to measure is not the average, because that measure is affected by the income of the extremely well paid – as has been the case in the past two decades.the proper income level to measure I think is the median income. If the median income rises, that measures that the material standard of living rises.To go a step further, perhaps we should be concerned more with the bottom quadrant of the population. In that case, the proper income level measure could be the 10th percentile income. When both the 10th percentile and the 50th percentile (i.e. median) incomes rise faster than the rate of inflation, we can safely say that people's material standard of living is improving.
>In calculating the personal incomes aren't we basically taking GDP and deducting the income that goes to institutions, companies, the government etc? After all GDP is a calculation of income, as output is equal to income.Yet the problem is that the money going to those other than individuals i.e. going to groups, may also benefit the individual. For instance a supermarket that grows by 10% but only pays its staff a 9% increase in wages could reduce the prices of its food products by the equivalent of that additional 1%. Hence incomes have increased by 9% and yet standard of living may have increased more, as the food shopper now has extra cash in his/her pocket.So surely the best way is to factor in income, GDP, GDP per capita, GNP, working hours etc and judge the standard of living against all factors?
All of the people except for the first person here have made on big mistake. What is this mistake?, you say. Well, each of you have taken the answer of the people before you and written your answer based upon that, instead of writing an answer that is completely your own.
Do you have an opinion of you own?