GDP is still the most frequently used indicator of a country’s development. When governments target economic growth as a key goal, it is growth in GDP to which they are referring. And they often make the assumption that growth in GDP is a proxy for growth in well-being. But is it time to leave GDP behind as the main indicator of national economic success? This is the question posed in the first of the linked articles below, from the prestigious science journal Nature.
As the article states:
Robert F. Kennedy once said that a country’s gross domestic product (GDP) measures “everything except that which makes life worthwhile”. The metric was developed in the 1930s and 1940s amid the upheaval of the Great Depression and global war. Even before the United Nations began requiring countries to collect data to report national GDP, Simon Kuznets, the metric’s chief architect, had warned against equating its growth with well-being.
GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country
So what could replace GDP, or be considered alongside GDP? Should we try to measure happiness? After all, behavioural scientists are getting much better at 
understanding and measuring the psychology of human well-being (see the blog posts Money can’t buy me love and Happiness economics).
Or should we focus primarily on long-term issues of the sustainability of development? Or should we focus more on the distribution of income or well-being in a world that is becoming increasingly unequal?
Or should measures of well-being involve weighted composite indices involving things such as life-expectancy, education, housing, democratic engagement, leisure time, social mobility, etc. And, if so, how should the weightings of the different indicators be determined? The United Nations Development Programme (UNDP) produces annual Human Development Reports, where countries are ranked according to a Human Development Index. As the UNDP site states:
The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.
HDI is a composite of three sets of indicators: education, life expectancy and income (see). The UNDP since 2010 has also produced an Inequality-adjusted HDI (IHDI).
The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. The difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality and can be expressed as a percentage.
You can now build your own HDI for each country on the UNDP site by selecting from the following indicators: health, education, income, inequality, poverty and gender.
The Nature article considers a number of measures of progress and considers their relative merits. The other articles also look at measuring national progress and well-being and at the relationship between income per head and happiness. It is clear that focusing on GDP alone provides too simplistic an approach to measuring development.
Development: Time to leave GDP behind Nature, Robert Costanza, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E. Pickett, Kristín Vala Ragnarsdóttir, Debra Roberts, Roberto De Vogli and Richard Wilkinson (15/1/14)
The happiness agenda makes for miserable policy The Conversation, Daniel Sage (9/1/14)
Economic view: No matter what the politicians say, GDP is a distorted guide to economic performance and a bad way to measure prosperity Independent, Guy Hands (28/1/14)
Buy buy love The Economist (22/6/13)
Experts confirm that money does buy happiness – but only up to £22,100 Independent, Jamie Merrill (28/11/13)
Can Money Buy Happiness? Scientific American, Sonja Lyubomirsky (10/8/10)
Money can buy happiness The Economist (2/5/13)
Money can buy happiness Hacker News, pyduan (13/1/14)
Can ‘happiness economics’ provide a new framework for development? The Guardian, Christian Kroll (3/9/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Financial crisis hits happiness levels BBC News (3/11/13)
Happiness study finds that UK is passing point of peak life satisfaction The Guardian, Larry Elliott (27/11/13)
How GDP became the figure everyone wanted to watch BBC News, Peter Day (16/4/14)
Economic development can only buy happiness up to a ‘sweet spot’ of $36,000 GDP per person Science Daily (27/11/13)
Questions
- What does GDP measure?
- How suitable a measure of economic progress is growth in GDP?
- How can GDP be adjusted to make it a more suitable measure of economic progress?
- What are the advantages of using composite indicators of well-being?
- What difficulties are there in measuring well-being using composite indicators?
- Assuming there were no measurement problems, what indicators would you include in devising the optimum composite indicator of well-being?
- Can money buy happiness?
- Why do life satisfaction levels peak at around $36,000 (adjusted for Purchasing Power Parity (PPP))?
Christine Lagarde, managing director of the IMF, has warned of the danger of deflation in the eurozone. She also spoke of the risks of a slowdown in the developing world as the Fed tapers off its quantitative easing programme – a programme that has provided a boost to many emerging economies.
Speaking at the World Economic Forum, in the Swiss Alps, she did acknowledge signs of recovery across the world, but generally her speech focused on the risks to economic growth.
Some of these risks are old, such as a lack of fundamental bank reform and a re-emergence of risky behaviour by banks. Banks have taken steps towards recapitalisation, and the Basel III rules are beginning to provide greater capital buffers. But many economists believe that the reforms do not go far enough and that banks are once again beginning to behave too recklessly.
Some of the risks are new, or old ones resurfacing in a new form. In particular, the eurozone, with inflation of just 0.8%, is dangerously close to falling into a deflationary spiral, with people holding back on spending as they wait for prices to fall.
Another new risk concerns the global impact of the Fed tapering off its quantitative easing programme (see Tapering off? Not yet). This programme has provided a considerable boost, not just to the US economy, but to many emerging economies. Much of the new money flowed into these economies as investors sought better returns. Currencies such as the Indian rupee, the Brazilian real and the Turkish lira are now coming under pressure. The Argentinean peso has already been hit by speculation and fell by 11% on 24/1/14, its biggest one-day fall since 2002. Although a fall in emerging countries’ currencies will help boost demand for their exports, it will drive up prices in these countries and put pressure on central banks to raise interest rates.
Christine Lagarde was one of several speakers at a session titled, Global Economic Outlook 2014. You can see the complete session by following the link below.
Articles
Lagarde warns of risks to global economic recovery TVNZ (27/1/14)
Lagarde Cautions Davos on Global Deflation Risk Bloomberg News, Ian Katz (26/1/14)
Davos 2014: Eurozone inflation ‘way below target’ BBC News (25/1/14)
IMF fears global markets threat as US cuts back on cash stimulus The Guardian, Larry Elliott and Jill Treanor (25/1/14)
Davos 2014: looking back on a forum that was meant to look ahead The Guardian, Larry Elliott (26/1/14)
Speeches at the WEF
Global Economic Outlook 2014 World Economic Forum (25/1/14)
Questions
- Why is deflation undesirable?
- What are the solutions to deflation? Why is it difficult to combat deflation?
- What are the arguments for the USA tapering off its quantitative easing programme (a) more quickly; (b) less quickly?
- How is tapering off in the USA likely to affect the exchange rates of the US dollar against other currencies? Why will the percentage effect be different from one currency to another?
- What are Japan’s three policy arrows (search previous posts on this site)? Should the eurozone follow these three policies?
Politicians often make use of economic statistics to promote their point of view. A good example is a claim made by the UK Prime Minister on 23 January 2014. According to the latest statistics, he said, most British workers have seen their take-home pay rise in real terms. The Labour party countered this by arguing that incomes are not keeping up with prices.
So who is right? Studying economics and being familiar with analysing economic data should help you answer this question. Not surprisingly, the answer depends on just how you define the issue and what datasets you use.
The Prime Minister was referring to National Statistics’ Annual Survey of Hours and Earnings (ASHE). This shows that in April 2013 median gross weekly earnings for full-time employees were £517.5, up 2.25% from £506.10 in 2012, and mean gross weekly earnings for full-time employees were £620.30, up 2.06% from £607.80 in 2012 (see Table 1.1a in the dataset). CPI inflation over this period was 2.4%, representing a real fall in median gross weekly earnings of 0.15% and mean gross weekly earnings of 0.34%.
But when adjustments are made for increases in personal income tax allowances, then, according to the government, except for the richest 10% of the working population, people had an average increase in real take-home pay of 1.1%.
But does this paint the complete picture? Critics of the government’s claim that people are ‘better off’, make the following points.
First, the ASHE dataset is for the year ending April 2013. The ONS publishes other datasets that show that real wages have fallen faster since then. The Earnings and Working Hours datasets, published monthly, currently go up to November 2013. 
The chart shows real wages from January 2005 to November 2013 (with CPI = 100 in December 2013). You can see that the downward trend resumed after mid 2013. In the year to November 2013, nominal average weekly earnings rose by 0.9%, while CPI inflation was 2.1%. Thus real weekly earnings fell by 1.2% over the period (click here for a PowerPoint of the chart).
Second, there is the question of whether CPI or RPI inflation should be used in calculating real wages. RPI inflation was 2.9% (compared to CPI inflation of 2.4%) in the year to April 2013. The chart shows weekly earnings adjusted for both CPI and RPI.
Third, if, instead of looking at gross real wages, the effect of income tax and national insurance changes are taken into account, then benefit changes ought also to be taken into account. Some benefits, such as tax credits and child benefit were cut in the year to April 2013.
Fourth, looking at just one year (and not even the latest 12 months) gives a very partial picture. It is better to look at a longer period and see what the trends are. The chart shows the period from 2005. Real wages (CPI adjusted) are 8.0% lower than at the peak (at the beginning of 2009) and 5.0% lower than at the time of the election in 2010. The differences are even greater if RPI-adjusted wages are used.
But even if the claim that real incomes are rising is open to a number of objections, it may be that as the recovery begins to gather pace, real incomes will indeed begin to rise. But to assess whether this is so will require a careful analysis of the statistics when they become available.
Articles
UK pay rising in real terms, says coalition BBC News (24/1/14)
Are we really any better off than we were? BBC News, Brian Milligan (24/1/14)
Government take-home pay figures ‘perfectly sensible’ BBC Today Programme, Paul Johnson (24/1/14)
Take-Home Pay ‘Rising Faster Than Prices’ Sky News, Darren McCaffrey (25/1/14)
David Cameron hails the start of ‘recovery for all’ The Telegraph, Peter Dominiczak (23/1/14)
Is take-home pay improving? The answer is anything but simple The Guardian, Phillip Inman and Katie Allen (24/1/14)
Cameron’s ‘good news’ about rising incomes is misleading says Labour The Guardian, Rowena Mason (24/1/14)
The Tories’ claim that living standards have risen is nonsense on stilts New Statesman, George Eaton (24/1/14)
FactCheck: Conservative claims on rising living standards Channel 4 News, Patrick Worrall (25/1/14)
Living standards squeeze continues in UK, says IFS BBC News (31/1/14)
Richest have seen biggest cash income squeeze but poorest have faced higher inflation IFS Press Release (31/1/14)
Data
Average Weekly Earnings dataset ONS (22/1/14)
Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Consumer Price Inflation, December 2013 ONS (14/1/14)
Inequality and Poverty Spreadsheet Institute for Fiscal Studies
An Examination of Falling Real Wages, 2010 to 2013 ONS (31/1/14)
Questions
- Why are mean weekly earnings higher than median weekly earnings?
- Explain the difference between RPI and CPI. Which is the more appropriate index for determining changes in real incomes?
- Find out what benefit changes have taken place over the past two years and how they have affected household incomes.
- How have gross weekly earnings changed for the different income groups? (The ASHE gives figures for decile groups.)
- Which is better for assessing changes in incomes: weekly earnings or hourly earnings?
- How would you define a change in living standards? What data would you need to be able to assess whether living standards have increased or decreased?
World leaders are meeting at the World Economic Forum in Davos, in the Swiss Alps. This annual conference is an opportunity for politicans, economists and businesspeople from around the world to discuss the state of the world economy and to consider policy options.
To coincide with the conference, the BBC’s Newsnight has produced the following slide show, which presents some economic facts about the world economy. The slide show provides no commentary and there is no commentary either in this blog – just some questions for you to ponder.
Using the economics you’ve learned so far, try answering these questions, which focus on the reasons for the patterns in the figures, the likely future patterns and the policy implications.
Slide show
Davos: 22 facts people should know BBC Newsnight (23/1/14)
Data
For additional international data to help you answer the questions, see:
Economic Data freely available online Economics Network
Questions
- Go through each of the slides in the Newsnight presentation and select the ones of most interest to you. Then, as an economist, provide an explanation for them.
- Identify some patterns over time in the statistics. Then project forward 20 years and discuss whether the patterns are likely to have changed and, if so, why.
- What policies could governments adopt to reverse any undesirable trends you have identified? How likely are these policies to be implemented and how successful are they likely to be?
In December 2013, Uruguay passed a law permitting the growing, distribution and consumption of marijuana. The legislation comes into effect in April 2014. The state will regulate the industry to ensure good quality strains of the crop are grown and sold. It will also tax the industry.
Uruguay is the first country to legalise cannabis, but in July 2012, Colorado and Washington states in the USA passed laws permitting the sale and possession of small amounts of the drug for recreational use. (It was already legal to possess the drug for medical use.) The laws took effect a few months later. It is heavily taxed, however, especially in Washington, where it is taxed at a rate of 25% three times over: when it is sold to the processor; when the processor sells it to the retailer; and when the retailer sells it to the consumer. In Massachusetts, Nevada and Oregon, medical cannabis shops will be permitted to open this year. In the Netherlands, although the sale of cannabis is still illegal, ‘coffee shops’ are permitted to sell people up to 5 grams per day.
So should cannabis be legalised? People have very strong views on the subject and this can make a calm assessment of the issue more difficult. The economist’s approach to legalising cannabis involves seeking to identify and measure the costs and benefits of doing so. If the benefits exceed the costs, then it should be legalised; if not, it should remain illegal (or made illegal). The problem is that the size of the costs and benefits are not easy calculate as they involve estimates of things such as consumption levels, tax revenues, crime reduction, the effects on the consumption of other drugs, including legal drugs such as alcohol and tobacco.
Nevertheless, various estimates of these costs and benefits have been made and provide a basis for discussion.
Possible benefits of cannabis legalisation include: increased tax revenues for the government; reduction in crime, and hence reduction in law enforcement and prison costs; encouraging people with addiction problems to seek help, as they would not fear arrest; reduction in the price, benefiting users; regulating quality of the drug; reducing the consumption of alcohol and more dangerous drugs if these are substitutes for cannabis; moral arguments concerning freedom of individuals to choose their lifestyle.
Possible costs include: increased consumption of cannabis, with attendant health and social side effects; increased consumption of other drugs if they are complements, or if cannabis is an ‘entry level’ drug to harder drugs; moral objections to drug taking.
Clearly some of these costs and benefits are easier to measure than others. Moral arguments are almost impossible to assess quantitatively, even when various underlying moral standpoints are agreed.
The following articles look at recent events and at the arguments, both economic and non-economic.
Articles
As Uruguay moves to legalise cannabis, is the ‘war on drugs’ finished? Metro (20/1/14)
Regulating the sale of marijuana: Global perspective Journalist’s Resource, John Wihbey (17/1/14)
Next Step in Uruguay: Competitive, Quality Marijuana Independent European Daily Express (IEDE) (12/1/14)
U.S. support for legalization of marijuana at an all-time HIGH Mail Online, Anna Edwards (7/1/14)
14 Ways Marijuana Legalization Could Boost The Economy Huffington Post, Harry Bradford (7/11/12)
Colorado pot legalization: 30 questions (and answers) The Denver Post, John Ingold (13/12/12)
Economists Predict Marijuana Legalization Will Produce ‘Public-Health Benefits’ Forbes, Jacob Sullum (1/11/13)
Papers
Economics of Cannabis Legalization Hemp Today, Dale Gieringer (10/10/93)
Pros & Cons of Legalizing Marijuana About.com: US Liberal Politics, Deborah White
Would Marijuana Legalization Increase the Demand for Marijuana? About.com: Economics, Mike Moffatt
Time to Legalize Marijuana? – 500+ Economists Endorse Marijuana Legalization About.com: Economics, Mike Moffatt
A cost benefit analysis of cannabis legalisation Institute for Social and Economic Research, University of Essex
Licensing and regulation of the cannabis market in England and Wales: Towards a cost–benefit analysis Institute for Social and Economic Research, University of Essex, Mark Bryan, Emilia Del Bono and Stephen Pudney (9/13)
What Can We Learn from the Dutch Cannabis Coffeeshop Experience? Rand Drug Policy Research Center, Robert J. MacCoun (7/10)
Podcast
Licensing and regulating the cannabis market in England and Wales Institute for Social and Economic Research, University of Essex, Stephen Pudney (15/9/13)
Questions
- If a country legalises cannabis, what is likely to happen to the price of cannabis? Use a demand and supply diagram to illustrate your argument, considering the effects on both demand and supply. How are the price elasticities of demand and supply relevant to your answer?
- What externalities are there from drug use?
- What externalities are there from making cannabis illegal?
- Distinguish between complementary and substitute goods for cannabis? How is the demand for these likely to be affected by legalising cannabis?
- Go through each of the benefits and costs of legalising cannabis and identify difficulties that might be experienced in quantifying these costs and benefits?
- If cannabis were legalised, how would you set about determining the optimum rate of tax on cannabis production, processing, distribution and sale?
- Consider the arguments for and against legalising cannabis from the perspective of (a) a free-market liberal and (b) a social democrat who sees government intervention as an important means of achieving various social goals.
GDP is still the most frequently used indicator of a country’s development. When governments target economic growth as a key goal, it is growth in GDP to which they are referring. And they often make the assumption that growth in GDP is a proxy for growth in well-being. But is it time to leave GDP behind as the main indicator of national economic success? This is the question posed in the first of the linked articles below, from the prestigious science journal Nature.
