Business and Marketing / Economics Essay


GDP is not a Perfect Measure of Well-Being

GDP is not a Perfect Measure of Well-Being.

The growth of the economy has created a rise in standards of living all over the world. Yet, modern economies have overlooked the fact that, perhaps, the standard indicator of economic growth, gross domestic product (GDP), estimates the size of the economy of a country, and does not represent the well-being of a nation. Yet, in some situations, lawmakers and economists also view GDP or GDP per capita, as an all-encompassing measure to describe the growth of a country, merging economic prosperity with social well-being. For this reason, economic growth strategies are seen as useful to society.

We understand now that the truth is not that easy. Because focusing solely on economic and GDP gain for evaluating success excludes the harmful effects of economic growth in the society, such as income inequality and climate change. It is time to recognize the shortcomings of GDP and extend our development of measurements to take into account the quality of life of a nation. This is beginning to happen in some countries. India, for example, is creating a Simplicity of Living Chart that measures sustainability, quality of life, and economic capacity.

Problems Associated to Measuring GDP

For a calendar quarter, the first estimation of actual GDP is considered the pre-estimate. It is released roughly one month after the quarter ends. To deliver a measure that quick, the Department of Commerce officials need to depend on information from very few households and firms. A month later, a revised estimate is issued, and some weeks later, its final assessment is released. The GDP pre-estimate/advance estimate and final estimate often do not tally. For instance, the 2001 recession started in March of that same year. The first actual GDP figures for the second and third quarters of 2001 revealed that production continued to increase. It wasn't until later revisions that it was clear that there was a recession going on.

But the story of revision isn't ending there. The Department of Commerce releases updated estimates for the past two to three years every summertime. The department performs a comprehensive analysis once every five years, which tracks flows of outputs and inputs across the economy. It concentrates on the productions of individual companies, which are inputs to other firms. The department revises actual GDP figures for the past five years in the course of performing this report. The adjustments can sometimes create a picture of economic activity that is very distinct from the one offered even by the updated GDP figures.

Service Sector

Another issue lies in calculating service sector development. In industry, the output of products is relatively easy to calculate. There are so many corn bushels and plenty of meat. Yet, what is a bank's output? Of a Hospital? The value of the dollar in production to join in nominal GDP is easy to record, but calculating the sum of output to be used in actual GDP is quite another thing. In some instances, the Department of Commerce reports the performance of the service sector based on the number of workers used.


Natural disasters, when it occurs, creates significant adverse effects in the society and people at large. GDP neglects the cost of wrecked cars, ruined homes, and displaced persons. Rebuilding after war or disaster can cause a significant rise in GDP.

Illegal and Underground Production

Many productions go unrecorded to evade laws or taxes. It’s probably not counted in GDP. Economic activity for which revenue is not registered to dodge taxation relatively occurs in what is regarded as the "underground economy." For instance, a carpenter may build a small extension to a dentist's home in return for orthodontic work for kids of the carpenter. Though revenue has been received and output accumulated in this haggling case, the activity is unlikely to be registered for income tax or other purposes and is therefore not included in GDP. For obvious reasons, illegal activities are not reported for income tax and are therefore hard to be included in GDP.

Free time or Leisure

Leisure is good for the economy. Everything being equal, it's better to have more leisure than less leisure.

But when it comes to recreational use, all other items are impossible to be the same. Less leisure use implies less time in the job. And that means less GDP produced. If everybody decides to work 10 percent fewer hours, GDP will reduce. But that isn't going to say people are worse off. In reality, their option of further leisure would imply that they choose the extra leisure by utilizing it to the services and products they give up. Consequently, a decrease in GDP would be followed by a rise in productivity, not a fall.


Society's health problems are only mirrored in the rise in health system expenses across GDP. An expensive system of health care would raise GDP's income. A Higher income is also not an indication of an individual's state of health. GDP does not represent a more modern health care system method that triggers life inefficiency, expectancy, behaviors, and prevention. The health costs and benefits are difficult to recognize in GDP.

Suggested way(s) to Measure GDP

For a better understanding of the people's well-being, several distinct determinants are created and implemented by many entities like; statistical offices (Eurostat, Destatis), international organizations (World Bank, UNDP), civil-society groups and initiatives (Sbilanciamoci!) or independent think-tanks (new economies center, Redefining Progress). All these indicators are classified into three various categories: replacing, adjusting, and supplementing GDP.

For the promotion of well-being, various people may have distinct opinions on this aspect. An economist shouldn't calculate well-being by using GDP alone based on one factor that is thoroughly representing economic welfare. Multiple indicators or statistics should be developed and used to describe the different aspects of the economic well being.

Finally, GDP is an easy indicator. Several crucial economic measures can be determined using this. Check the tax revenue and efficiency, for example. It also aids in estimating the gaps in output and inflation. Hence it is commonly used to measure the performance of an economy.

GDP is, therefore, merely a "gross" term. This includes depreciation or the substitution of depreciated capital. The loss, though, will not offer economic benefits. Replacing physical capital brings the economy back to its origins. Also, it measures the total goods produced in a nation but does not estimate the total income received by the nation's people. Many of the revenue that is included in GDP can yield by and go to outsiders.

ThereforeGDP is not a Perfect Measure of Well-Being, GDP is inadequate to calculate well-being. Economists must not rely solely on GDP for measuring well-being. Other indicators should be used to evaluate well-being in various dimensions.

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