Rethinking GDP Finance & Development, March 2017

If household income and consumption are not yet published in the national accounts, these measures should be developed as a step towards distributional indicators. Also, work on the distributional indicators for consumption should proceed regardless of whether data are available for compiling the income distribution. For a long time, gross domestic product (GDP) per capita was widely accepted as a measure of economic welfare. But over time a more pragmatic view by economists and non-economists was adopted to underline that GDP per capita is an imperfect measure of broader well-being. Accounting for the manifold limitations of this indicator, alternative—and often complementary—approached were suggested. Although these developments are doubtlessly useful, they are still insufficient to comply with a broader spectrum of aspects that are addressed with sustainability.

A dashboard of welfare indicators is an effective way to disseminate information on welfare. The disposable income of the total economy should also be disseminated if it differs significantly from national income. In addition, a complementary measure of net income that adjusts for depletion of natural resources may be needed. If it is disseminated, the underlying assumptions should be identified.

A. Indicators of Economic Welfare in the SNA

In that case, is their equal GDP truly measuring the prosperity of those nations? The GDP per capita of the U.S. economy is larger than the GDP per capita of Germany, as Table 6.9 showed, but does that prove that the standard of living in the United States is higher? Not necessarily, since it is also true that the average U.S. worker works several hundred hours more per year more than the average German worker. Calculating GDP does not account for the German worker’s extra vacation weeks. A common procedure for estimating variety gains assumes an inverse relationship between quality-adjusted prices and expenditure shares of varieties.

Data gaps in compiling the welfare indicators of the SNA are common. Key data on households are not yet provided in the institutional sector accounts, including by many participants in the G20 DGI. Criticisms of the national accounts as disregarding welfare tend to overlook the information on welfare conveyed by the SNA measures of income, consumption, wealth and prices. Economic analysts also overlook these welfare indicators when they focus exclusively on GDP and the GDP deflator. In some ways, the rise in GDP understates the actual rise in the standard of living. For example, the typical workweek for a U.S. worker has fallen over the last century from about 60 hours per week to less than 40 hours per week.

Economics

NSOs should develop complementary indicators that provide a complete, though uncertain, picture of the effects of digitalization on welfare growth through their own research capabilities and in collaboration with outside experts. This work should draw on existing academic research on welfare and digitalization. NSOs should also prioritize improvements in compilation of deflators that will allow the welfare gains from new digital products, models and suppliers to be captured in household consumption growth.

Standard of Living – Limitations of GDP as a measure of Wellbeing

But police and military services contribute less to welfare. The GDP does not take into account the unequal distribution of income in a country. It may possible with rise of GDP, inequalities in the distribution of GDP may also rise. Thus if we depend only on GDP, we are underestimating the economic welfare. These non-exchange and non-monetary production activities are left out from GDP on account of the non-availability of data and the problem of evaluation.

So, improvements in health will not only elevate welfare directly but are also likely to result in higher incomes and future welfare improvements in a virtuous cycle. Welfare grew more quickly than income during the recent global financial crisis (chart below). This is particularly true for countries that were hardest hit in Western Europe and North America. The only exception is Asia, which had an impressively high level of growth in both income and welfare.

International Comparisons of Real GDP and GNP

1. Raworth advocates that economic measures include monetized and un-monetized goods and services, so that the status and contributors to each economy are more accurate.
2. Illegal activities are not reported for income taxes for obvious reasons and are thus difficult to include in GDP.
3. A joke among economists goes that if you marry your car mechanic, GDP will fall.
4. As the host for the 2008 games, it won an impressive total of 100 medals.
5. It first considers economic welfare and its place in a measurement framework that extends to broader aspects of well-being.
6. Lower prices online are one of the drivers of substitution from physical outlets to e-commerce.

But the fact that a task is difficult does not mean it is impossible. When the data suggest huge disparities in levels of GNP per capita, for example, we observe real differences explain the limitation of gdp as welfare. in living standards. Real GDP or GNP estimates are often used in comparing economic performance among countries. In making such comparisons, it is important to keep in mind the general limitations to these measures of economic performance that we noted earlier.

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