Why GDP Isn’t An Ideal Measurement Of National Wealth

A reality of economics is that whether it is between consumers and vendors, business owners, multinationals, or entire countries, economy exists today in the strict sense of trade and money competition. As with any competitive endeavour, we like to keep score and see who is on top. There are many ways to compare countries in this way. From life expectancy and childbirth, to the number of multinational companies, to the quality and amount of education enjoyed by a country’s people. The most common measurement used, though, is more or less what we might call ‘profit': how much wealth the country has, and how much money it is making on a yearly basis. In other words, the country that produces the most at the highest profits is deemed to have the best economy.

This is a relatively simple way of comparing economies, but its simplicity also leaves a lot to be desired. Just because a country makes a lot of money doesn’t necessarily mean it has a better functioning economy in spending or saving. No offense to China, but just because it has the second largest economy by gross domestic product (GDP) doesn’t mean it has the best economic model in terms of spending and equality. When choosing a place to live based on economics, we’re willing to bet people care more about how the money will affect them than how much money the country gets as a whole.

We’re going to look at the at the most common ways economics sorts and compares countries. Though the goal here isn’t to argue for one measure over another, we will be focusing on the shortcoming of the (GDP) because it is the most popular, and, like any popular thing, has earned itself the most attention and judgment.

The Basics Of How We Measure

To even start thinking about comparison, we need to actually have some standard to measure – something to add up, so to speak. The wealth of a nation is similar to that of a person: the value of their things minus their debts, and expenses spent getting or keeping those things. So in lots of ways, we can think of national wealth simply as the ‘net worth’ of a given nation.

Just like calculating the net worth of a celebrity or a business, we start by taking the total ‘gross’ value of all the country’s assets. This figure usually includes the value of tangible assets owned and produced, like real estate and consumer goods plus financial assets like bonds, mutual funds, pensions, etc. We then subtract liabilities like mortgages, credit, and debt, all of which are technically ‘borrowed’ money. Whatever is left over is the net worth, or wealth, of the nation. But it can get a little more complicated because economics likes to do that.

The geography and the prices we attach to the things we add up change the net worth. So, for example, if we calculate the net worth of a nation by adding all things produced in its borders by home-owned companies as they would sell at market value (the price they would get in an open and fair market), we would get the gross domestic product (GDP). If we calculated the same thing but added all things produced internationally by home-owned companies, we would get the gross national product (GNP).

Our Usual Measurement And Why It’s Not Great

Because it’s an easy calculation, includes most of the tangible and intangible assets of a country, and lends itself to comparison, the GDP is a very common figure we hear used a lot in media and whatnot. Like most things in life, however, it is a little too good to be true. There are a lot of problems that come with using unaltered GDPs, both domestically and internationally. All of these stem from why we want to know the GDP in the first place: to see who is making more of the more expensive stuff. Although this view is changing now, it’s still the status quo, so let’s look at what it entails.

GDP Shortcomings

The fact is: there are lots of problems with using GDP, but it’s easy to calculate and it tells us who has the most money. This mentality comes with a few noteworthy issues:

First, GDP tends to whitewash inequalities within the economy. GDP can be used to make lots of further calculations, the easiest and most-used of which is “per capita” income, or the amount of money the average citizen makes. This number is gotten just by dividing GDP by the population and voila, per capita. For example, the US GDP in 2012 was $16.24 trillion, with a population of roughly 317 million, for a per capita of about $51,000-$52,000. We then use that number to work out the supposed “standard of living.” Problem: according to the CIA World Factbook, the US ranks 41st worst in worldwide equality based on the GINI coefficient, another economic/social index. This also doesn’t factor in unpaid work, illegal wages, unsold products, and the like. GDP can give people a very rose-tinted view.

The second issue is purchasing power parity (PPP), which GDP doesn’t include by definition. PPP, to put it simply, is a way of equaling currencies out so you can actually compare them. PPP refers to the amount a given currency needed to buy a single good. This helps us figure out exactly how many yen a dollar is worth. Without PPP calculations added onto it, GDP could make the US economy appear twice as ‘strong’ as Mexico’s when in reality it might be only slightly bigger. But again, PPP isn’t always added, so we get stuck into thinking some economies are stronger or weaker than they are.

Finally, and this is the big issue for lots of people today, GDP fails completely at showing what all that wealth is doing. Inequality touches on this issue, but the plot goes much deeper. For example, GDP and per capita used to calculate the standard of living might make it seem like the US has the highest standard of living in the world, but it lacks the education and health programs of many welfare states. Not only that, but it doesn’t have a great environmental record. It’s not that the rest of the world is perfect, but certain facts ought to considered.

Some New Choices

All of these issues paint a rather bleak picture for GDP. We’re not trying to say that the GDP doesn’t have its uses, because it clearly does, but there would obviously be some benefit in adopting a new standard. It isn’t too out there to say that recent financial issues have been in part because of the way money distribution went unnoticed thanks to how we measure progress.

Instead of focusing solely on production and recorded work, we may benefit from measures that showcase social realities. Lots of measures like that exist, but we don’t place as much emphasis on them because it simply isn’t a priority by the people measuring and reporting. The United Nations Human Development Index (UNHDI, or HDI), measures economic growth, like GDP, but also factors in the impact this growth has on people in their social settings. So under this measure, Norway and Australia come in above the US.

In a similar way, from an environmental point of view, the Gross Environment Product (GEP) or “green GDP”, measures the cost of growth by including the damages to both people and ecosystems in the process of producing GDP products. There are other measures that combine factors from GEP and HDI, but really, it just becomes so ridiculously complicated that the original point of tracking progress sort of gets lost. That’s one thing GDP definitely has working for it.

Clearly there are other options out there, but it really depends on what you find important. If you only want to know which country is producing more and getting more money for those products, the GDP is a great measure – it’s grand, it’s awesome. The issue comes in when we want to measure the more serious consequences of economics. But let’s face it… any measure is going to be arbitrary, so it’s really just a matter of personal interest.

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Why GDP Isn’t An Ideal Measurement Of National Wealth