Friday, March 31, 2006

GDP: Grossly Distorted Picture

I was just mentioning how even economists don't think GDP is a good measure of nation's economic wellbeing. And to prove my point, I have an article from none other than The Economist. And if you can't trust The Economist to speak for economists, who can you trust?

There has been much hullabaloo about corporate accounting scams in America, yet perhaps the biggest accounting oversight of all time remains hidden in governments' own national figures. GDP per head is the most commonly used measure of a country's success, yet it is badly flawed as a guide to a nation's economic well-being. A new study in the OECD'S 2006 Going for Growth report considers some alternatives.

A nation's well-being depends on many factors ignored by GDP, such as leisure time, income inequality and the quality of the environment. GDP was developed primarily as a planning tool to guide the huge production effort of the second world war. It was never intended to be the definitive yardstick of economic welfare. Would another indicator change the ranking of countries or their relative performance over time?

GDP should ideally be reduced to take account of pollution and the using-up of non-renewable resources, but no standard accounts that can do this are yet available.
The report shows that the US has the highest GDP of any of the OECD nations, and still ranks first in most cases even when adjusted for leisure and inequality. But, as the graph shows, there are actually a couple where the US gets beat: to the Netherlands when you account for leisure (hey man, if pot is legal you gotta take advantage), and to Britain and France when you adjust for income inequality.

Who knew that France had such equality in its income distribution? Obviously not the immigrant youth that were burning cars in the streets.

So, if everyone agrees GDP isn't the best indicator, why are we still using it?
GDP is clearly not the best indicator of well-being, but the OECD concludes that for most purposes it is the best that is available on a timely basis. The OECD takes comfort from the fact that most alternative measures yield similar international rankings to GDP per head.
And there is the rub. For all its faults, it is the easiest to calculate and it still works as a fairly good proxy.

via The Economist

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