Thursday, April 22, 2010

How Useful is GDP for measuring living standards?







Just in time for our class! The Economist is currently running an online debate about the usefulness of GDP statistics. Read through the two sides of the debate (you don't have to read all the comments) and prepare a few ideas for a comment to post on The Economist Web site. We will put together a few group comments to post on Monday, so as not to overwhelm the site with our positions.

Your group comments should also be posted here on this blog so I can find them easily for marking purposes.

Click HERE to get to the debate online - have fun!

10 comments:

  1. On the whole, Andrew Oswald brought up interesting, valid points, indicating GDP growth as a poor measure of improving standard of living, but Steve Landefeld had some questionable points. I agree with Mr. Oswald’s points, particularly the idea on how in this modern age, societies with a higher standard of living may spend and produce less, in order to be more environmentally conscious. In addition to this, GDP growth includes crime, divorce and other natural disasters as economic gain, arguably factors which do not demonstrate an improvement in standard of living. Furthermore, GDP takes no account of income distribution, and many countries with high GDP rates still have many unemployed and poor people. As Mr. Landefeld pointed out, GDP only measures a country’s economic activity gain. Therefore there is no distinguishing between gain through positive or negative aspects and the rich and the poor. However, I believe his statement about what GDP is weakens his claim against the notion because he himself stated GDP is ‘imperfect’. Why should we extend or add on to it as a measure, if we could just concentrate on finding and creating a better alternative instead?

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  2. Nick, Ayaka, Ryan, MichelleApril 26, 2010 at 4:14 AM

    Landefeld’s statement does not necessarily support the idea that GDP growth is a good measure of improving living standards, seeing as the opponent of the argument states GDP is merely “proven useful as a gauge” for improving living standards. Therefore, Oswald’s claim that “GDP is a gravely dated pursuit” seems to coincide, to a certain degree, with Landefeld’s statement. It is agreed by both sides that GDP does not account for certain aspects critical when measuring the improvement of living standards. As Oswald highlights, the problems lie in the Easterlin Paradox, Global Warming, and the fact that fact that “humans are animals of comparison”. Oswald and Landefeld both mention the fact that sustainability is not, but must be, accounted for when trying to improve living standards. As both sides of the argument find need to include this measure, it is a vital supplement to add to GDP (when used as a measure of improving living standards). In conclusion, it appears obvious that GDP is not sufficient in measuring the improvement of living standards.

    Nick, Ayaka, Ryan, Michelle

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  3. Kevin, Anselm, Moritz 1, Moritz 2April 26, 2010 at 5:21 AM

    GDP is not a effective measure of standard of living in countries because it was originally created to measure production gains during the Second World War. One problem is the fact that GDP does not account for income distribution in a country. As Mr. Lane clearly states, GDP can only portray an aggregate of all incomes, thus not representing more accurate income distribution. For instance, in recent decades the top 5% of US households had significant increases in their incomes. Yet, GDP cannot discern that minority from the whole and represents this small increase as an increase for all citizens. Another drawback is that GDP ignores the non-market economy, including childcare, elder care, home-based tasks, volunteer work, and a sense of community. These contribute positively to a country’s living standards, but these activities are unfortunately not included in GDP because no money changes hands. These reasons are just two of many examples of why GDP is a bad measure of standard of living.

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  4. In our opinion, Gross Domesitc Product (GDP), as a measure of standard of living, is not accurate enough. It has many flaws such as including spending to compensate for natrual disasters as a positive component of GDP. A great example of this would be Florida, after the Hurrican Andrew hit consumption and investment increased a lot. Moreover the GDP ignores the non- market economy of household and community: the crucial function of vlounteer work goes complety unrecorded in the GDP because no money is involved. There are also substitutes for GDP like the Happy Planet Index(HPI) or the Human Development Index(HDI). In our opinion Bhutan is an example of a country that tries to achieve ultimate happiness and therefore reflects the Happy Planet Index way of measuring happiness. However it also displays the negatives of this measurement: „strong“ countries like America would be displayed as very weak in this ranking because it has a huge ecological footprint. In our opinion HDI is the most valuable way of judging the standard of living of a country and the health of an economy.

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  5. Astrid, Elayne, Martin, MattApril 28, 2010 at 12:46 AM

    GDP may be an effective way of measuring economic activity, however, in terms of determining the standard of living it is absolutely ineffective. Part of the reason for this inefficiency is due to the fact that GDP growth is made up of factors that affect the standard of living negatively as well as positively. For instance, when crime rates surge and need for security measures and medical costs rise, GDP increases. Income distribution is neglected in the measure of GDP as well. Other measurements such as HDI (or the Human Development Index) would be a better measure for the standard of living in a society, as it takes into account the GDP as well as health (through life expectancy), and education (through the literacy rate). Perhaps an even better alternative would be The Happy Planet Index which takes into account the ecological footprint of countries, and does not take into account GDP at all. However, before society can measure progress in its standard of living, it needs to define what the ideal standard of living actually means. But, all in all, GDP is, indeed, a poor measure of living standards.

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  6. Dear Sir,

    This debate on GDP is extremely controversial, but we believe that although GDP has flaws in itself of measuring the standard of living in a country, it cannot be overlooked. For instance, Steve Landefeld has made an important point that the GDP “is a concrete measure of the economic output and incomes available to meet the material needs of society and advance standards of living”. For example, with the GDP data, one would be able to distinctly understand that the German economy is better off than the one in Zimbabwe. Nevertheless, the GDP doesn’t help distinguish the marginal differences in standard of living. Furthermore, the GDP also has other problems, for example, it doesn’t take account the income distribution, which means that the gain of GDP may not affect the whole nation, but only specific parts of the population. In addition, the GDP treats negative events as a benefit for the overall economy. For example, crime, divorce or natural disasters add billions of dollars to the GDP due to the need of lawyers, security measures, medical costs etc. A specific example would be Hurricane Katrina, which added more than $200 billion dollars on reconstruction, which would have significantly raised the GDP rates.
    Therefore, although GDP gives some indication of the standard of living and overall health of an economy, it still has problems. Hence, in order to make GDP more reliable, we can use indicators such as the HDI (Human Development Index) which includes GDP per capita at PPP to measure the standard of living. This would make the use of GDP more reliable as a statistical measurement to determine the standard of living and health of an economy.

    Jung Hyun, Soo min, Alex and Daigoro

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  7. Julia W., Friedi K., Rosa S., Vivian M., Constantin vS.April 28, 2010 at 12:47 AM

    GDP as a single source, though effective as a measurement of economic growth and real output, is a poor form of measurement as the standard of living. The fact that it doesn’t include the non-market economy of households and communities due to no exchange of money, such as charities, child and elder care and volunteer work, it shows that it doesn’t include vital factors that contribute to a healthy society. Furthermore it counts activities which are negative for standard of living as positive for GDP growth, like divorce, crime, natural disasters, and pollution. Also, it takes no account of income distribution and treats the depletion of natural capital as income. To more effectively determine an economy’s standard of living, it should be used in combination with other measurement systems, like the Human Development Index, the Happy Planet Index . By doing so, one creates a better balance of determining an economy’s growth by including a wider range of essential factors in a country’s functioning.

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  8. As with everything, the truth is found in the middle. As Steve Landefeld said, GDP was created with the intention of being a framework during a time of a dire need for some form of measurement of society’s progress. Significant changes need to be made to the GDP, but it should not be discarded completely. Both points of view presented in this debate have valid arguments to the usefulness of the GDP. Nonetheless, many people would disagree with Landefeld’s statement that there is no other valid measurement of society’s well-being. The Human Development Index for instance does exactly what Landefeld said an expansion 0f GDP should do; it considers GDP per capita, while taking into account the literacy rate as well as life expectancy. However, it is also wrong to state that GDP should be completely discarded and revised as it presents an accurate view on an “economy’s capacity to improve living standards”. In short, the GDP should be expanded so that it takes Oswald’s four points into account. In conclusion, the GDP alone is not a sufficient measure of living standards and other measures, for example the HDI, should be considered.

    By Viola Wohlgemuth, Catie Carberry, Austin Hewitt & Lucas Hess

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  9. It is very interesting to see that the two opposing arguments do not contradict each other. Oswald states that GDP is not a good measure to determine a countries standard of living as a higher GDP does not tend to make people happier. Landefeld does not go against this as he states that there is room for improvement, however he finds that because there is no better current measurement, it should not be put down. We agree with Oswald that GDP is not a sufficient measure of standard of living as it has several flaws. For example, when GDP is high it does not necesairly mean that people are happier as high incomes become the norm. This is shown by which country is the happiest of the world. This is Denmark and has known it does not have the highest GDP per capita of the world. Additionally, it does not show income distribution and it treats negative things like natural disasters (e.g. earthquakes) and crime as economic gain. However, we think instead of removing it completely we can use GDP as part of composite indicators like HDI (Human Development Index) and/or HPI (Happy Planet Index) to also include happiness instead of economic output only. Eventhough GDP is not a reliable measurement of happiness, it can be more precise when other measurements compliment it.


    -Sanneke
    -Timur
    -Saskia
    -Christopher

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  10. The debate revolves around GDP being a bad measure of standard of living. However, returning to the core idea of GDP, it becomes obvious that GDP was never actually meant for measuring the standard of living, but rather the economic growth. Since there is no alternative for measuring happiness, GDP was wrongly applied. There is no alternative, simply because the accuracy of measuring standard of living involves too many factors, each of different weight. One has to consider that GDP includes industries which are not considered beneficial to people’s standard of living due to externalities such as pollution. However, including GDP into a composite measure of standard of living such as the Human Development Index (HDI) would make sense, because income is always an essential component for satisfying basic needs such as food or health which contribute to a better quality of life.

    By Aoi, Fabio, Jasper && Paddy Frech

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