GDP is often used as a measure of wellbeing, even though it is really only a measure of the market value of a nation’s output or an indicator of economic activity. But although higher consumption can improve living standards, it is only one contributor to wellbeing, whether at individual or social level.
There are essentially four types of problems from using GDP as a measure of how society is doing.
The first is that it does not include (as negative figures) many external costs, such as pollution, stress and family breakdown related to work.
The second is that it includes things that are produced to counteract the adverse effects of increased production, such as security, antidepressants, therapy and clean-up activities.
The third is that it ignores things that are produced and do contribute to wellbeing and yet are not traded in the market. Examples include volunteer work, the ‘output’ of clubs and societies, work within the home, production from allotments and various activities taking place in the ‘underground economy’ to avoid taxation.
The fourth is the sustainability of economic growth. If we deplete natural resources, the growth of today may be at the cost of the wellbeing of future generations.
Then there is the question of the distribution of the benefits of production. Although GDP figures can be adjusted for distribution, crude GDP growth figures are not. If a few wealthy get a lot richer and the majority do not, or even get poorer, a growth in GDP will not signify a growth in wellbeing of the majority.
Then there is the question of the diminishing marginal utility of income. If an extra pound to a rich person gives less additional wellbeing than an extra pound to a poor person, then any given growth rate accompanied by an increase in inequality will contribute less to wellbeing than the same growth rate accompanied by a decrease in inequality.
The first article below criticises the use of crude indicators, such as the growth in GDP or stock market prices to signify wellbeing. It also looks at some alternative indicators that can capture some of the contributions to wellbeing missed by GDP figures.
Want to know how society’s doing? Forget GDP – try these alternatives The Guardian, Mark Rice-Oxley (27/1/17)
The Increasingly Inadequate Measurement Of Productivity The Market Mogul, Chris Woods (20/1/17)
Why GDP fails as a measure of well-being CBS News, Mark Thoma (27/1/16)
Limitations of GDP as Welfare Indicator The Sceptical Economist, zielonygrzyb (31/7/12)
- Should GDP be abandoned as an indicator?
- How could GDP be refined to capture more of the factors affecting wellbeing?
- Go through each of the indicators discussed in the first article above and consider their suitability as an indicator of wellbeing.
- “Everywhere you look, there are better benchmarks than these tired old financial yardsticks.” Identify three such indicators not considered in the first article and discuss their suitability as measures of economic performance.
- How might the benefit you gain from free apps be captured?
- Consider the suitability of these alternatives to GDP.
Deflation is currently a concern in the UK and across Europe. However, relative to Japan, the deflation concern is small. In Japan, deflation has been problematic for more than two decades and this has had significant implications for the Japanese economy.
‘Abenomics’ has been in practice in Japan, as the Prime Minister, Shinzo Abe, has been trying to reflate the economy. Growth has been improving and the deflation concern appeared to be under control. However, GDP data now shows that the economy is once again declining and so with aggregate demand falling, this pushes down average prices across the economy and so the deflation risk re-emerges. This article from BBC News and another from The Guardian look at the economic policy known as ‘Abenomics’ and how the Japanese economy is faring.
Off target: Is it the end of ‘Abenomics’ in Japan? BBC News, Rupert Wingfield-Hayes (15/2/16)
Japan’s economy shrinks again as Abenomics is blown off course The Guardian, Justin McCurry (15/2/16)
Japan’s deflation fears grow (update) (27/2/16)
Riding the Japanese roller coaster (15/2/16)
Japan’s interesting monetary stance as deflation fears grow (14/2/16)
Japan’s arrows missing their target (17/11/14)
Japan’s recovery (3/2/14)
Abenomics – one year on (16/12/13)
Japan’s three arrows (6/6/13)
- What are the key features of Japan’s ‘Abenomics’?
- Why is deflation such a concern? Surely falling prices are good for consumers and hence the economy.
- How has Japan been trying to reflate its economy and why has this failed?
- The yen is getting stronger, but how will this affect the Japanese economy? Use a demand and supply diagram to illustrate what has caused the value of the yen to fall and an aggregate demand and supply diagram to show the impact.
- Negative interest rates have been implemented in Japan. What does this mean for savers and borrowers and the economy?
- How do you think Japan’s stance on immigration and structural change is affecting its macroeconomy?
Two surveys have been released looking at the quality of life in cities and the levels of happiness of their residents. The first is a three-yearly Eurobarometer survey by the European Commission focusing on 83 European cities/conurbations. This survey finds that, despite growing concerns about immigration, terrorism and stagnant real incomes, levels of satisfaction have remained stable since the 2012 survey. In all except six cities, at least 80% of respondents say that they are satisfied to live in their city. The highest scores (above 98%) are in the north of Europe.
The second is the 2016 Quality of Life Survey (an annual survey) by the consultancy firm, Mercer. This looks at cities worldwide, particularly from the perspective of employees of multinational companies being placed abroad. The survey found that the top ten cities by quality of life include seven in Europe, and that the five safest cities in the world are all in Europe.
So what is it that makes the quality of life so high in many European cities, especially those in Germany, Austria, Switzerland, the Netherlands and Scandinavia? Is it that income per head is higher in these cities? In other words, is the quality of life related to GDP?
The answer is only loosely related to GDP. What seems more important is people’s income relative to other people and whether their income relative to other people is rising.
But people regard the quality of life in cities as depending on other factors than simple relative income. One factor common across all cities is household composition. People are least happy if they live on their own.
Other factors include: a feeling of safety; how well integrated different ethic and social groups are felt to be; the quality of public transport; the cleanliness of the city; health care provision and social services; the quality of schools and other educational establishments; sports facilities; cultural facilities; parks and other public spaces; the quality of shops, restaurants and other retail outlets; the quality and price of housing; the ease of getting a job; trust in fellow citizens; environmental factors, such as air quality, noise, traffic congestion and cleanliness; good governance of the city. The top three issues are health services, unemployment and education and training.
Although cities with higher incomes per head can usually afford to provide better services, there is only a loose correlation between income per head and quality of life in cities. Many of the factors affecting quality of life are not provided by the market but are provided publicly or are part of social interaction outside the market.
Happiness in Europe The Economist (25/2/16)
Happiness in Europe: What makes Europeans happy? It depends on where they live The Economist (27/2/16)
Rating Europe’s Most and Least Happy Cities CityLab, Feargus O’Sullivan (9/2/16)
Europe’s Nicest Cities Aren’t Its Happiest Ones Bloomberg, Therese Raphael (2/2/16)
Vienna named world’s top city for quality of life The Guardian, Patrick Collinson (23/2/16)
Vienna named world’s best city to live for quality of life, but London, New York and Paris fail to make top rankings Independent, Loulla-Mae Eleftheriou-Smith (23.2.16)
The world’s most liveable cities: London and Edinburgh rank in top 50 The Telegraph, Soo Kim (23/2/16)
Quality of Life in European Cities 2015 Flash Eurobarometer 41 (January 2016)
Quality of Life in European Cities 2015: Individual Country Reports Flash Eurobarometer 41 (January 2016) (This may take a short while to download.)
Quality of life in European Cities 2015: Data for Research Flash Eurobarometer 41 (January 2016)
2016 Quality of Living Rankings Mercer (23/2/16)
Western European Cities Top Quality of Living Ranking Mercer, Press Release (23/2/16)
- Why, do you think, is the quality of life is generally higher in (a) most northern European cities than most southern and eastern European ones; (b) most European cities rather than most north American ones?
- To what extent is (a) absolute real income per head; (b) relative real income per head an indicator of quality of living in cities?
- Why, do you think, are Italians less satisfied with the quality of life in their cities than residents of other western European countries?
- What factors affect your own quality of living? To what extent do they depend on the city/town/village/area where you live?
- Look at the list of factors above that affect quality of life in a given city. Put them in order of priority for you and identify any other factors not listed. To what extent do they depend on your age, your background, your income and your personal interests and tastes?
- Identify a particular city with which you are relatively familiar and assume that you were responsible for allocating the city’s budget. What would you spend more money on, what less and what the same? Provide a justification for your allocation.
- Discuss the following passage from the Bloomberg article: “What is striking is that there appears to be a correlation between those who report high levels of satisfaction and those who view foreigners in their city as an advantage. Conversely, respondents who complained loudest about transportation, public services, safety and other issues tended to view the presence of foreigners far less favorably.”
Economics, but not as we know it. As the introduction to this programme on BBC radio 4 suggests, there has been criticism and concern about the way in which we think about economics. About, how it’s taught; the lessons we learn and whether we need to have a re-think. Tomas Sedlacek is a Czech economist and has a different way of thinking about this subject.
Humanomics is certainly a new way of thinking about economics and considering how it links and can be applied to a wide range of areas: the Bible; movies such as Fight Club and the Matrix. This 30 minute discussion between Evan Davies and Tomas Sedlacek provides some interesting insights and thoughts on some of the current challenges facing this subject and some novel insights into how we could change our thinking.
Tomas Sedlacek: The Economics of Good and Evil BBC Radio 4 (25/01/16)
- How do we define and measure value? Is this always possible? Can you think of some things where we cannot assign prices or numbers to values?
- How could economics be relevant Adam and Eve?
- Think about the marriage market. How would you apply the model of demand and supply to this most unusual of markets?
- What insights does Tomas Sedlacek provide about the ancient business cycle and this might affect our thinking about debt and assets?
- Do you think that refugees are of benefit to a country? If you don’t think they are of benefit, does this mean that countries should not accept them?
- If we did find out that corruption or crime and terrorism were of benefit to the GDP of a country, would you encourage it? Or would you place the morality issue above the actual figure of contribution?
According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.
But this raises three questions.
The first is whether, in the face of falling growth rates, progress in poverty reduction can be maintained.
The second is whether the World Bank is measuring extreme poverty in the right way. It is now defined as living on less than US$1.90 a day in 2011 prices – until a few weeks ago is was $1.25 in 2005 prices. As a result of this rebasing, global poverty falls from 14.5% of the world’s population (or 1011 million people) under the old method to 14.2% (or 987 million) under the new.
The third question is whether countries can improve their data collection so that a truer estimate of poverty can be made.
As far as the first question is concerned, Kim states that to stimulate growth, ‘every dollar of public spending should be scrutinised for impact. Every effort must be made to improve productivity.’ What is more, three things must happen:
||Economic growth must lift all people. It must be inclusive.
||Investment in human beings is crucial – especially investing in their health and education. Malnourished and poorly educated children will never reach their full potential and countries, in turn, will fall short of their economic and social aspirations.
||We must ensure that we can provide safety nets that prevent people from falling back into poverty because of poor health, economic shocks, or natural disasters.
As far as the second question is concerned, there are many who argue that $1.90 per day is far too low a measure of the extreme poverty threshold. It is a purchasing-power parity measure and is equivalent to what $1.90 would buy in the USA in 2011. But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’
But even if living on below $1.90 a day is defined as extreme poverty, it is important not to see the problem of poverty as having been solved for people who manage to achieve an income slightly above that level.
The third question is how to improve data. There is a paucity and unreliability of data in many developing countries. According to Kim:
Our report adds that data is sparse and inconsistent across the region and globally. Some 29 countries around the world had no poverty data from 2002 to 2011, so they could not track their progress. Another 28 had just one survey that collected poverty data during that time.
This is a situation that must change to improve the world’s ability to tackle poverty. In fact, we can’t accomplish our goal if we do not have enough information to know whether people are actually lifting themselves out of poverty. For that we need to address huge data gaps. We need robust data.
The best news in the world: we have made real progress towards ending extreme poverty The Guardian, Jim Yong Kim (3/11/15)
Could you live on $1.90 a day? That’s the international poverty line The Guardian, Jason Hickel (1/11/15)
Making international trade work for the world’s poorest The Guardian, Jim Yong Kim and Roberto Azevêdo (30/6/15)
Global Poverty Will Hit New Low This Year, World Bank Says Huffington Post, Lydia O’Connor (23/10/15)
The international poverty line has just been raised to $1.90 a day, but global poverty is basically unchanged. How is that even possible? World Bank blogs, Francisco Ferreira, Dean Mitchell Jolliffe and Espen Beer Prydz (4/10/2015)
Why Didn’t the World Bank Make Reducing Inequality One of Its Goals? World Bank blogs, Jaime Saavedra-Chanduvi (23/9/13)
$1.90 Per Day: What Does it Say? Institute for New Economic Thinking, Rahul Lahoti and Sanjay Reddy (6/10/15)
Reports and papers
The Role of Trade in Ending Poverty WTO and World Bank (2015)
Poverty in a Rising Africa World Bank (1/10/15)
Ending extreme poverty and sharing prosperity: progress and policies World Bank, Marcio Cruz, James Foster, Bryce Quillin and Philip Schellekens (October 2015)
- Explain how the World Bank calculates the extreme poverty line.
- Why, if the line has risen from $1.25 per day to $1.90 per day, has the number of people recorded as being in extreme poverty fallen as a result?
- Why has the number of people in extreme poverty been rising over the years and yet the percentage of people in extreme poverty been falling?
- What policies can be adopted to tackle poverty? Discuss their practicality?
- Are reduced poverty and increased economic growth consistent policy goals? (See the blog post Inequality and economic growth.)
- What are the inadequacies of using income per day (albeit in ppp terms) as a measure of the degree of poverty? What other indicators of poverty could be used and how suitable would they be?
- How could international trade be made to work for the world’s poorest?