GDP is Not the Same as Well-being
March 2nd 2010 18:48
Over at EconLib, David Henderson takes on those who idolize GDP over actual welfare:
He tackles two main problems with Gross Domestic Product throughout the rest of his article. First, GDP counts government costs as a positive, instead of their actual value. In other words, if the government spends $10 billion on something that adds only $3 billion to our well-being, it is the $10 billion that is added to the GDP figure. This leads to a tendency to overvalue government spending. Second, he points out that non-market transactions are not included in GDP. The example he uses is one of a man marrying his maid. The maid, now wife, will continue to do housework (most likely), but it will no longer count toward GDP. This makes the economy, as measured by GDP, contract, but no welfare was actually lost.
His solution:
Definitely read the whole article.
Will Wilkinson has more, as does Arnold Kling.
Follow me on Twitter: @AGoldenDoor
When economics professors teach the basics of Gross Domestic Product (GDP), we usually caution our students that it is not a good measure of welfare. Unfortunately, many economists go on to give GDP far more credit than it deserves. They tend to consider fiscal and monetary policy positive if these policies increase GDP, but they often fail to ask, let alone answer, whether those same policies increase or reduce welfare. I have a term for giving GDP such a sacred a place in economists' reasoning: GDP fetishism.
His solution:
If, instead of seeking GDP, we ask of each government policy, "What will it cost and how much value will it create?" we will come up with better policies. The concept of GDP, handled carefully, can be useful. But for many people, and even many good economists, GDP has been used to judge wellbeing even when using it that way leads to highly misleading conclusions.
Will Wilkinson has more, as does Arnold Kling.
Follow me on Twitter: @AGoldenDoor
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