Download Macroeconomic Measurements Aggregate Output and

Macroeconomic Measurements
Aggregate Output and Income
Limitations of GDP and Alternative Indexes
Page 1 of 2
Over on the board, we’ve got data on gross domestic product for eight different countries. Studying
this data you can learn a lot really fast. For instance, while the United States gross domestic
product is significantly higher per capita than that of China, the growth rate of GDP of China is much
higher. How long will it be before Chinese GDP per capita catches up with that of the United States?
The real point of this lesson is what does this data tell us? Does GDP reliably indicate the quality of
life in one country verses another? Or over time, when the GDP in one country grows, does that
mean that life there is getting better?
Let’s consider all the factors that are left out when we calculate GDP. GDP, after all, refers to the
market value of all goods and services produced in a country in a given period of time, but what’s
left out of that calculation of market value? First of all, the value of leisure: the harder people work
to produce a given amount of goods and services, the less time they have for having fun off the job.
Countries with more leisure may be better places to live.
What about the value of other environmental factors? Cleaner air, clean water, and forests that are
healthy. People want to enjoy the outdoors, and they want to feel safe about their environment.
That has value, and it’s not showing up anywhere in the GDP.
What about the value of household production: people making things at home, cooking, cleaning,
the care of children, household repairs, not showing up in GDP and still making our lives better.
What about the quality of goods? Whenever we’re trading goods and services, we may not be
distinguishing those that have high quality from those that have low quality. High quality, low
quality, all that matters in the GDP is how much people paid for something.
The underground economy is also trading goods and services that are not being registered in GDP
data. The more economic activity is going on in a country, the more people are getting goods and
services without creating any trace in the GDP. That causes GDP numbers to misstate the actual
material transaction in a country.
What about crime? The higher the crime rate in a country, probably the less the quality of life
there; not showing up in the GDP. And health and welfare, the higher the standard of health in an
economy the better the quality of life. And finally, the distribution of income. Economies where a
small number of people control most of the wealth and most people are poor would probably be a
much less desirable place to live than a country where income is more evenly distributed and there
isn’t such wide disparity.
What would we do then if we wanted to come up with a wider measure, a broader more inclusive
measure of the factors that influence quality of life? We might consider, for instance, the alternative
that has been proposed by the United Nations: the human development index. It includes life
expectancy at birth, as well as adult literacy, and school enrollments in GDP per capita. Averaging
and aggregating those measures of welfare, they come up with numbers that rate countries like
Norway, Sweden, and Australia right at the top of the list. The U.S. by comparison is rated eighth,
while we top lists that are basically boiled down to only GDP. This list is trying to tell us that while
GDP is one important component, it may not be the thing that is determinate of quality of life.
Macroeconomic Measurements
Aggregate Output and Income
Limitations of GDP and Alternative Indexes
Page 2 of 2
Another, possibility has been proposed by a group called Redefining Progress in San Francisco. This
group has its genuine progress indicator, which includes not only measures of income but also the
distribution of income, the value of household production, caring for children and the elderly,
volunteerism, and hours spent in free time with family or in community activities. The genuine
progress indicator in the United States has been relatively flat during years in which our GDP was
growing rapidly. In some years, recent years, the genuine progress indicator has actually declined.
The point of this lesson has been to raise questions about what the GDP really tells us about the
quality of life in a country. Information is left out, things we care about: the environment, our
leisure time, the distribution of income. And measures are now being promoted by the United
Nations, by other nonprofit groups, that give us a broader look at those factors that influence quality
of life, and by those measures the United States is rated differently than it is in tables of GDP.